paul d. velasco, esq.* · most common estate planning mistakes that lead to litigation (or other...

MOST COMMON ESTATE PLANNING MISTAKES THAT

LEAD TO LITIGATION (OR OTHER COURT ACTIONS)

—AND HOW TO AVOID THEM

By:

Paul D. Velasco, Esq.*

*Certified Specialist in

Estate Planning, Probate and Trust Law

California State Bar Board of Legal Specialization

velascolawgroup.com

myestatelitigation.com

562-432-5541

Presented To:

South Bay Estate Planning Council

May 14, 2020

MOST COMMON ESTATE PLANNING MISTAKES THAT LEAD TO LITIGATION OR OTHER COURT ACTIONS—AND HOW TO AVOID THEM

1. Failure to Properly Fund Trust

a. Failure to Properly Title Assets — Ticket to probate court

i. No Funding Upon Trust Creation

ii. Refinancing Real Property

iii. Property Acquired After Trust Creation

b. Case No. 1 — Property Acquired After Trust Creation —VLG Case # 1

c. Estate of Heggstad (1993) 16 Cal.App.4th 943 and 943 and Ukkestad v. RBS Asset Finance, Inc. (2015) 235 Cal.App.4th 156 — Proving the settlor's intent may save the day...but only if you take advantage of it:

d. Drafting Tips to Avoid Funding Problems

i. Add "Statement of Intent" to Trust Document — APPENDIX 1 (pg. 1)

ii Include Schedule of Trust Assets — APPENDIX 1 (pg. 2)

(1) Add "General Assignment" Language on Trust Schedule

(2) Identify "Excluded Assets"

iii. Prepare Letters to Financial Institutions and Insurance Companies — APPENDIX 2 (pg. 5)

e. Petition to Confirm Trust Assets (California Probate Code §850(a)(3)) — Sample Heggstad Petition APPENDIX 3 (pg. 13)

f. Disputes Involving Titling of Accounts — The Problem with Joint, POD and TOD Accounts: VLG Case #2 —Dispute Re: Settlor's Intent

i. California Multiple Party Accounts Law — Probate Code §5100 et seq.

ii. Presumption of Title for Joint Accounts— Probate Code Section 5302(a): Funds belong to the surviving party unless there is "clear and convincing evidence" of a different intent.

iii. Drafting Tips to Avoid or Minimize Funding Problems and Disputes —

1. Clarify Intent Re: Joint Accounts and POD/TOD Beneficiaries — APPENDIX 4 (pg. 22)

2. Fiduciary Litigation

a. Breach of Fiduciary Duties — Trustee is bound to act in the highest good faith towards the beneficiary

i. Duty to Administer Trust According to Terms — (e.g., failure to timely distribute trust assets—outright distribution or HEMS standard) — Probate Code §16000

ii. Duty of Loyalty — to act in the best interests of the beneficiaries (e.g., favoring the interests of others over trust beneficiaries) - Probate Code §16002

iii. Duty of Impartiality (e.g., favoring the interests of certain beneficiaries over others) - Probate Code §16003

iv. Duty to Avoid Conflicts of Interest/Self-Dealing (e.g., purchasing trust property without consent of beneficiaries; taking commissions on sale of real property) - Probate Code §16004

v. Duty of Disclosure (e.g., failure to keep beneficiaries informed of trust administration, trust assets and actions of trustee) - Probate Code §16060-16061.5

vi. Duty Not to Delegate (e.g., allowing other individuals to use powers and authority of trustee) - Probate Code §16012

vii. Duty to Keep Trust Assets Separate (e.g., commingling trust assets with personal assets and accounts) - Probate Code §16009

viii. Duty to Enforce or Defend Claims (e.g., failure to enforce debt obligations owed to settlors) - Probate Code §§16010 and 16011

ix. Duty To Make Trust Property Productive (e.g., failure to collect rents) - Probate Code §16007

b. Accountings: What is the Proper Accounting Period?

1. VLG Case #3

ii. General Rule for Irrevocable Trusts — Trustee of irrevocable trust generally has duty to account at least annually, at trust termination and on a change of trustee to beneficiaries who are entitled to distributions of income or principal—Probate Code §16062(a).

iii. General Rule for Revocable Trusts — Unless the trust provides otherwise, during the time that a trust is revocable and the person with power to revoke is competent, trustee has no duty to account to remainder beneficiaries—Probate Code §15800.

iv. Evangelho v. Presoto (1998) 67 CA4th 615, 624 — The beneficiaries may be able to compel an accounting for the period when the trust was revocable upon a showing that a material breach of trust is reasonably likely to have occurred.

v. In re: Estate of Giraldin (2012) 55 Ca1.4th 1058 — A remainder beneficiary may have standing to sue the trustee for breach of fiduciary duty owed to the settlor while the settlor was still alive if the breaches caused harm to the beneficiary's interest.

vi. Babbitt v. The Superior Ct. of L.A. County (2016) Second District, Div. Seven, B263917 - While a trust is revocable, a trustee owes duties solely to the settlor, and a contingent beneficiary may not compel a trustee to account for a revocable trust as long as the settlor is not incapacitated, incompetent, or subject to undue influence. Even though a beneficiary has standing to compel an accounting or information from a trustee when a trust or a portion of a trust becomes irrevocable, the probate court does not have the authority to order a trustee to account or provide information regarding a revocable trust while it is still revocable and the settlor is competent and not subject to undue influence.

c. Compensation

i. General Rule — Trustee is entitled to compensation in accordance with the trust instrument —Probate Code Section 15680(a)

ii. If trust does not specify compensation, trustee is entitled to "reasonable compensation" under the circumstances—Probate Code §15681

1. What is "reasonable compensation?"—Restatement (Third) of Trusts lists several factors to be considered: (i) local custom; (ii) trustee's skill and experience; (iii) time spent; (iv) amount and

character of the trust property; (v) difficulty, responsibility and risk assumed; (vi) nature and cost of services rendered by others; and (vii) quality of trustee's performance.

iii. Don't Be Afraid to Specifically Define In EP Documents-- APPENDIX 5 (pg. 23)

1. Flat Fee vs. Hourly Rate

iv. Avoid "No-Compensation Clauses For Child/Beneficiary Trustee" Without First Discussing With Client

d. Steps to Minimize Problems and Future Disputes

i. Choosing the Right Successor Trustee — Must Discuss With Client

1. Characteristics of a Good Trustee: Honest, Trustworthy, Fair (Peacekeeper), Good Communication Skills, "Follow Through" Mentality/Task Oriented, Self-Motivated, Seeks Advice From Professionals

2. Characters to Avoid: Dictator/Bully Types (Adams Family Trust), Do-It-Yourselfers, Does Not Communicate or "Play Well" With Others.

3. Consider Using Corporate Trustees (i.e., Banks & Trust Companies) and/or Licensed Prof. Fiduciaries

ii. Properly Advising Successor Trustees

iii. Provide Trust Administration Memorandum— APPENDIX 6 (pg. 24)

iv. Be Mindful of Conflicts of Interest (Representing Trustee in Fiduciary Capacity Only—Not As Beneficiary)

3. Choosing the Right Type of Trust for Your Client's Family and Financial Circumstances — A Discussion About A/B; A/B/C; and A/B Disclaimer (Flexible) Trusts

a. Client's Should Make Informed Choices

b. Are A/B Trusts Still Necessary with Portability? In a word, "YES!!!"

c. Power of Appointment for Surviving Spouse

d. Proper Planning for Blended Families

e. Consider a "Hybrid Trust"—APPENDIX 7 (pg. 32)

f. What if Surviving Spouse Does Not Want to Fund A/B Trust? VLG Case #4

i. Modification or Termination of Trust by Settlor and All Beneficiaries—

Probate Code §15404

1. Agreement Re: Termination of Irrevocable Trust(s)— APPENDIX 8a (pg. 39)

2. Agreement Re: No Establishment of Bypass Trust— APPENDIX 8b (pg. 44)

3. Petition for Approval of Modification —APPENDIX 9 (pg. 50)

ii. Modification or Termination of Trust Based on Changed Circumstances—

Probate Code §15409—See also APPENDIX 9 (pg. 50)

g. Revocable Survivor's Trust—Disputes over Revocability of Specific Gifts by Deceased Settlor—VLG Case #5

i. Presumption of Revocability—Unless a trust is expressly made revocable by the trust instrument, the trust is revocable by the settlor—Probate Code §15400.

ii. See Drafting Tip —APPENDIX 10 (pg. 66)

4. Common Mistakes Involving Gifts of Real Property

a. Failing to Properly Draft for Contingencies:

i. What if the beneficiary doesn't survive the settlors? Does the gift lapse? Is the property to be distributed with the remainder of the trust estate?

ii. What if the real property is no longer part of the trust estate on the death of the settlors?

1. Consider "allocation" vs. "gifting"

iii. Does the gift of real property include a replacement property?

iv. Does the gift of real property include proceeds of sale?

v. Is the gift of real property free of mortgages, encumbrances, etc.? Is the gift subject to estate taxes?

vi. See Sample Provision - Appendix 11 (pg. 69)

b. Gift of Real Property to Grandchildren

i. Discuss Property Tax Reassessment Issue With Clients

ii. Be Careful with Sprinkling Trusts that Provide for Sprinkling of Income and/or Principal to Grandchildren

Consider Written Agreement with Child. See Appendix 12 (pg. 71)

c. Avoiding Property Tax Reassessment — Transfers Between Parent and Child

i. General Rule: The county assessor reassesses a parcel's value for any "change in ownership" to full fair market value as of the date thereof. A "change in ownership" is defined as "a transfer of a present interest in real property, including beneficial use thereof, the value of which is substantially equal to the value of the fee interest."

ii. Proposition 58: Transfers Between Parents and Children (R&T 63.1): A transfer of a principal personal residence and up to $1,000,000 (of assessed value before death) of other real property is exempt for reassessment, if the proper forms are filled out on a timely basis. It is important to note that these interests must be held individually or in trusts and not in business entities. This exception includes the grandparents to the grandchildren if the parents are dead. It is important to note that there is no exception for transfers amongst siblings.

1. Transfers Through Medium of Trust — County Tax Assessor will request a copy of the Trust upon the death of the settlor(s)

2. Avoiding Reassessment for Transfers Between Siblings

a. Post-death Non-Pro Rata Allocations of Trust Property

b. Trust Loan rather than Sibling "Buyout" — BOE Opinion Letter 2008/018 - See Appendix 13 (pg. 75)

c. Include Provision in Trust for Child's Option to Purchase Real Property— Per Cal. BOE Annotations 625.0233—See Appendix 14 (pg. 103)

APPENDIX 1

Statement of Intent — Estate of Heggstad

1.3. Statement of Intent. The primary purpose of the settlor in the establishment of this

trust is to create a plan for the management and distribution of the trust property in the event of

the settlor's incapacity and at the time of the settlor's death. The secondary purpose of this trust

is the avoidance of probate. The settlor will make best efforts to properly fund this trust and

maintain proper title to the settlor's assets during the settlor's lifetime in order to achieve that

purpose. However, the settlor also recognizes that from time to time, either through error or

inadvertence (such as the refinancing of real property held in trust), title to certain assets may not

properly reflect trust ownership. Therefore, if at any time in the future, it becomes necessary to

initiate a court proceeding to determine title to certain assets of the settlor, whether currently

owned or hereafter acquired, due to the fact that title is not properly reflected in the name of the

trust, the settlor requests that the court liberally construe the settlor's intent to avoid probate and

make an order (in accordance with the court's holding in Estate of Heggstad (1993) 16 CA4th

943 and Ukkestad v. RBS Asset Finance, Inc. (2015) 235 Cal.App.4th 156 and their progeny)

determining that such assets are part of the trust estate, to be held administered and distributed

pursuant to the terms of this trust instrument, as may be amended from time to time.

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SCHEDULE OF COMMUNITY PROPERTY ASSETS

1. All funds held in any and all accounts at BANK OF U.S. in the name of either or both

settlors, except the following: (1) tax deferred savings plans, including, without limitation, IRA,

401(k), pension, profit-sharing, Keogh and qualified and non-qualified annuities; and (2)

accounts of either settlor which have been or are hereafter transferred to a separate property trust

established by either settlor.

2. All funds held in any and all accounts at U.S. FEDERAL CREDIT UNION in the

name of either or both settlors, except the following: (1) tax deferred savings plans, including,

without limitation, IRA, 401(k), pension, profit-sharing, Keogh and qualified and non-qualified

annuities; and (2) accounts of either settlor which have been or are hereafter transferred to a

separate property trust established by either senior.

3. All right, title and interest of the settlors in that certain Promissory Note executed by

TOM JONES on January 12, 2010.

4. Real property commonly known as 547 Main Street, Anytown, California (APN: 336-

092-09), having the following legal description: Lot 78 of Tract 5377, in the City of Anytown,

County of Orange, State of California, as per map recorded in Book 196, pages 45 — 47 of

Miscellaneous Maps in the Office of the County Recorder of said County.

5. Any and all interest in the time-share known as WESTIN MISSION HILLS, located

in Palm Springs, California.

6. Any and all life insurance policies owned by either or both settlors, as well as any and

all benefits payable under such policies, including, without limitation, death benefits.

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7. All of the settlors' right, title and interest in all shares of stock of ACME PAPER

COMPANY, INC. standing in the name of both settlors, or either of them, on the books of said

corporation.

8. All of the settlors' right, title, and interest in and to all of the settlors' property, of

whatsoever kind and character, whether tangible, real, personal or mixed, wherever located, and

whether presently or hereafter acquired in the future, including, without limitation, all right, title,

and interest in and to all of the following:

Real estate, time-shares, oil and gas rights, mineral rights, partnerships, corporations and other business entities, cash, cash equivalents, notes, bank accounts, stocks, bonds, insurance policies, mutual funds and other investments, copyrights, patents, royalties, beneficial interest(s) in another person(s) Living Trust or Estate, residential and household furniture, furnishings and appliances, jewelry, gold, musical instruments, pictures, paintings, objects of art, books, silverware, silver pieces, rugs, linen, china, boat, motor home and automobiles (and any other motorized vehicles), together with any insurance policies thereon and any proceeds of these policies.

The only exceptions to the foregoing, in other words, those assets not transferred hereby,

are as follows:

(1) Tax-deferred savings plans, including but not limited to the following: IRA, 401 (k),

pension, profit-sharing, Keogh and qualified and non-qualified annuities.

(2) Any right, title and interest in any property that is legally forbidden from transfer to a

Living Trust either by court decree, contract, or any other binding agreement.

(3) Any and all separate property of either settlor which has been or is hereafter

transferred to a separate property trust established by either settlor.

Dated: September 5, 2019 STEVEN S. SMITH

Dated: September 5, 2019 LYNETTE SMITH

3

SCHEDULE OF SEPARATE PROPERTY ASSETS

OF STEVEN S. SMITH

1. None.

Dated: September 5, 2019


STEVEN S. SMITH

LYNETTE SMITH

SCHEDULE OF SEPARATE PROPERTY ASSETS

OF LYNETTE SMITH

1. None.



STEVEN S. SMITH

LYNETTE SMITH

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APPENDIX 2 Transfer Letters

Lynette Smith 1234 First Street Street Small Town, CA 90001

DATE: May 24, 2016

TO: NEW HOME INSURANCE CO.

RE: POLICY NUMBER:

PROPERTY ADDRESS: 1234 First Street Street Small Town, CA 90001

I have recently executed a revocable Living Trust, wherein I am the Settlor, Trustee and the sole beneficiary of the Trust.

I hereby request that you add the following as an additional insured under the above-referenced policy:

LYNETTE SMITH, Trustee of the LYNETTE SMITH LIVING TRUST, dated May 24, 2016.

Please forward to me any additional forms that you may require me to sign in order to complete this request. I would appreciate your prompt handling of this matter.

I hereby request that you add the above-mentioned Trust as an additional insured under my policy.

LYNETTE SMITH

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DATE: May 24, 2016

TO: SECOND UNITED BANK

RE: ACCOUNT NUMBER: 0000-12345678


I hereby request that you transfer title of the referenced account to the following designation:


If the above-referenced account is a checking account, please retitle the account to the trust as requested, but the checks should continue to bear my individual name and not the name of the trust. Please be advised that these instructions should not be followed if the subject account is an IRA. My Social Security Number may be used in lieu of a Tax Identification Number for the trust. I would appreciate your prompt handling of this matter.

I hereby declare that I transfer the referenced assets to LYNETTE SMITH as Trustee of the above-referenced Trust.

LYNETTE SMITH

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DATE: May 24, 2016

TO: GLOBAL INVESTMENTS, INC.

RE: ACCOUNT NUMBER: 1234567890


I hereby request that you transfer all securities held in the above-referenced account to my newly executed Living Trust as follows:


Please advise me when the account has been transfened and confirm that all securities are now held by the Trust. Please be advised that these instructions should not be followed if the subject account is an IRA. My Social Security Number may be used in lieu of a Tax Identification Number for the Trust. Kindly forward to me any additional forms that you may require me to sign in order to complete this transfer. I would appreciate your prompt handling of this matter.

I hereby declare that I transfer the referenced assets to LYNETTE SMITH as Trustee of the above-mentioned Trust.

LYNETTE SMITH

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DATE: May 24, 2016

TO: THE WALT DISNEY COMPANY

RE: CERTIFICATE NUMBER: C987654321


Enclosed is the above original Certificate signed and Medallion Signature guaranteed. I hereby request that you transfer title of the Certificate to the following designation:


Please be advised that these instructions should not be followed if the subject Certificate is part of an IRA or pension plan.

My Social Security Number may be used in lieu of a Tax Identification Number for the Trust. Kindly forward to me any additional forms that you may require me to sign in order to complete this transfer. I would appreciate your prompt handling of this matter and return of the reissued Certificate directly to me.

I hereby declare that I transfer the referenced assets to LYNETTE SMITH as Trustee of the above-referenced Trust.

LYNETTE SMITH

8


DATE: May 24, 2016

TO: UNIVERSAL LIFE INS. CO.

RE: POLICY NUMBER: WF-87643210 INSURED: LYNETTE SMITH


I hereby request that you transfer the beneficiary of the above-referenced policy to the following designation:

LYNETTE SMITH LIVING TRUST, dated May 24, 2016.

My Social Security Number may be used in lieu of a separate Employer Identification Number for the Trust.

Please forward to me any additional forms which you may require me to sign in order to complete this transfer. I would appreciate your prompt handling of this matter.

I hereby declare that I transfer the beneficiary of the above-referenced policy to LYNETTE SMITH as Trustee of the above-mentioned Trust.

LYNETTE SMITH

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[OPTION 1]

DATE: May 24, 2016

TO: United Retirement Services, Inc.

RE: ACCOUNT NUMBER: 123450987 IN THE NAME OF: LYNETTE SMITH


I hereby request that you transfer the primary beneficiary of the above-referenced account to the following designation:

LYNETTE SMITH LIVING TRUST, dated May 24, 2016.

DO NOT CHANGE THE OWNERSHIP OF THE ACCOUNT.

Please forward to me any additional forms that you may require me to sign in order to complete this transfer. I would appreciate your prompt handling of this matter.

I declare that I transfer the beneficiary of the foregoing account as stated above.

LYNETTE SMITH

Settlor and Trustee under the LYNETTE SMITH LIVING TRUST

10


[OPTION 2]

DATE: May 24, 2016

TO: United Retirement Services, Inc.

RE: ACCOUNT NUMBER: 123450987 IN THE NAME OF: LYNETTE SMITH

I have recently executed a revocable Living Trust. In order to further my estate planning objectives, I hereby request that you change the beneficiaries of the above-referenced account in accordance with the attached Designation of Beneficiary form.

DO NOT CHANGE THE OWNERSHIP OF THE ACCOUNT.

Please forward to me any additional forms that you may require me to sign in order to complete this transfer. I would appreciate your prompt handling of this matter.

I hereby request that you change the beneficiary of the foregoing account as stated in the attached Designation of Beneficiary form.

LYNETTE SMITH

11


DATE: May 24, 2016

TO: MANAGING PARTNER PARTNERSHIP NAME: Forever Partners, a California Limited Partnership ADDRESS:

RE: PARTNERSHIP INTEREST


I hereby request that you transfer my interest in the partnership to my newly executed Living Trust as follows:


My Social Security Number may be used in lieu of a Tax Identification Number for the Trust. Kindly forward to me any additional forms which you may require me to sign in order to complete this transfer. I would appreciate your prompt handling of this matter.

Please advise me when the partnership has approved this transfer and has ratified the same.

I hereby declare that I transfer the referenced assets to LYNETTE SMITH as Trustee of the above-mentioned Trust.

LYNETTE SMITH

12

APPENDIX 3— HEGGSTAD PETITION 1

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Paul D. Velasco, Esq., SBN: 192421 Peter A. Sahin, Esq., SBN: 222207 VELASCO LAW GROUP, a Professional Corporation 333 W. Broadway, Suite 100 Long Beach, CA 90802 (562) 432-5541 Phone (562) 432-5581 Fax

Attorneys for Petitioner and Trustee of the

Living Trust

SUPERIOR COURT OF CALIFORNIA

COUNTY OF LOS ANGELES

CENTRAL DISTRICT

Case No.:

PETITION FOR ORDER CONFIRMING TRUST ASSETS (California Probate Code §850(a)(3))

DATE: May 20, 2018 TIME: 8:30 a.m. DEPT: 27

Petitioner, , as Successor Trustee of the Living

Trust, dated September 30, 2015 (hereafter referred to as the "Trust"), alleges and petitions the Court

as follows:

BACKGROUND FACTS AND INFORMATION

1. Livin Trust and Pour Over Will. On September 30, 2013,

, as settlor and trustee, created the Living Trust (the

"Trust"). A true and correct copy of the Trust is attached hereto as Exhibit 1 and incorporated herein

by reference. On that same day, (hereafter referred to as "Settlor"), also/3

In Re:

The LIVING TRUST, dated September 30, 2013.

created a pour-over will naming the Trust as sole beneficiary. A true and correct copy of the will is

attached hereto as Exhibit 2 and incorporated herein by reference.

2. Death of Settlor. The Settlor died on November 18, 2015. A true and correct copy of

Settlor's death certificate is attached hereto as Exhibit 3 and incorporated herein by reference.

3. Petitioner's Standing. Pursuant to section 6.1 entitled "Successor Trustees," on page 10

of the Trust, became the Successor Trustee of the Trust following the death

of the Settlor.

4. Jurisdiction and Venue. The usual place where the day-to-day activity of the Trust is

carried on is in the City of Long Beach, County of Los Angeles, State of California. Therefore,

jurisdiction and venue are proper. California Probate Code Sections 17002(a) and 17005(a)(1).

5. Property Held Outside of Trust. On August 26, 2014, approximately one year

following the creation of the Trust, the Settlor purchased an interest in an apartment in Leisure World

Seal Beach, a senior living community and took title thereto in his individual name, as follows:

(SINGLE), AS SOLE OWNER.". The apartment is located at S.

Fairfield, # , Seal Beach, California, and the Settlor's ownership is evidenced by two separate

stock certificates: (i) one share of Series H common stock of Seal Beach Mutual No. Six, a California

Corporation; and (ii) one active membership certificate of Golden Rain Foundation, a California

nonprofit mutual benefit corporation. True and correct copies of the Seal Beach Mutual No. Six

Certificate No. 368 and Golden Rain Foundation of Seal Beach Active Membership Certificate

(collectively referred to hereinafter as the "Leisure World Stock") are attached hereto as Exhibit 4 and

Exhibit 5, respectively. Although the Settlor had executed the Trust approximately one-year prior to

purchasing the Leisure World Stock, Petitioner is informed and believes, and thereon alleges, that the

Settlor took title to the stock in his individual name through inadvertence, and without appreciating the

difference, significance or legal consequence of taking title in his individual name rather than in the

name of his Trust. At the time of the Settlor's death, title to the Leisure World Stock remained in his

individual name.

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6. Relief Requested by Petitioner. By this Petition, Petitioner seeks an order of this Court

confirming that all right, title and ownership of the Leisure World Stock is part of the Trust estate, to

be held, administered and distributed by the successor trustee pursuant to the terms of the

Living Trust, dated September 30, 2015.

MEMORANDUM OF POINTS AND AUTHORITIES

7. Probate Code §§ 850(a)(3)(B) and 856. California Probate Code §§ 850(a)(3)(B) and

856 permit a trustee, or any interested person, to file a petition requesting that the court make an order

directing the person having title or possession of property to transfer the property to the trustee, and

that the court shall make such an order if it is satisfied that the trustee has a claim to the property and

that a transfer should be made.

8. Evidence of The Settlor's Intent. In Section 1.3 of the Trust, the Settlor clearly

expressed his intent that all of his assets be held as part of his Trust estate, whether such assets existed

at the time he created the Trust or were acquired at any future time. Section 1.3 of the Trust states as

follows:

"1.3. Statement of Intent. The primary purpose of the settlor in the establishment of this trust is to create a plan for the management and distribution of the trust property in the event of the settlor's incapacity and at the time of the settlor's death. The secondary purpose of this trust is the avoidance of probate. The settlor will make best efforts to properly fund this trust and maintain proper title to the settlor's assets during the settlor's lifetime in order to achieve that purpose. However, the settlor also recognizes that from time to time, either through error or inadvertence, title to certain assets may not properly reflect trust ownership. Therefore, if at any time in the future, it becomes necessary to initiate a court proceeding to determine title to certain assets of the settlor, whether currently owned or hereafter acquired, due to the fact that title is not properly reflected in the name of the trust, the settlor requests that the court liberally construe the settlor's intent to avoid probate and make an order (in accordance with the court's holding in Estate of Heggstad (1993) 16 CA4th 943, determining that such assets are part of the trust estate, to be held administered and distributed pursuant to the terms of this trust instrument, as may be amended from time to time." (Emphasis added).

9. Schedule of Trust Assets. Furthermore, in Section 2.1 of the Trust, the Settlor declares

that the "Schedule of Trust Assets" attached to the Trust is part of the "trust estate," and that the

"trustee shall hold, administer, and distribute the property described on the Schedule of Trust

Assets.. .in accordance with the provisions of this instrument." The Schedule reflects the Settlor's 15

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intent to transfer to the Trust all accounts titled in his name at Schoolsfirst Federal Credit Union. In

addition, paragraph 2 of the "Schedule of Trust Assets" (on page 26 of the Trust) states the Settlor's

intent to transfer to the Trust the following property:

"2. All of the settlor's right, title, and interest in and to all of the settlor's property, of whatsoever kind and character, whether tangible, real, personal or mixed, wherever located, and whether presently or hereafter acquired in the future, including, without limitation, all of the settlor's right, title, and interest in and to all of the following:

Real estate, time-shares, oil and gas rights, mineral rights, partnerships, corporations and other business entities, cash, cash equivalents, notes, bank accounts, stocks, bonds, insurance policies, mutual funds and other investments, copyrights, patents, royalties, beneficial interest(s) in another person(s) living trust or estate, residential and household furniture and furnishings, musical instruments, pictures, paintings, objects of art, books, silverware, silver pieces, rugs, linen, china, boat, motor home and automobiles (and any other motorized vehicles), together with any insurance policies thereon and any proceeds of these policies." (Emphasis added).

10. The Court's Holding in Estate of Heggstad. In Estate of Heggstad (1993) 16 CA4th

943, the court held that a declaration by a settlor to hold in trust certain assets described on a schedule

attached to the trust document serves as a legal transfer of such assets into the trust. In Ukkestad v.

RBS Asset Finance, Inc. (2015) 235 Cal.App.4th 156, the court of appeals further held that, for the rule

of Heggstad to apply, the trust instrument need not describe the property by reference to any specific

unique identifying information, such as the address or legal description, and may generally state an

intent to assign the ownership of all of property to the trustees of the trust.

As discussed above, the facts of this case fall squarely within the court's holdings in Estate of

Heggstad and Ukkestad v. RBS Asset Finance.

11. Property Claimed by Successor Trustee. Pursuant to the facts, evidence and authorities

cited above, Petitioner requests that this Court confirm as Trust property all right, title and ownership

of the following property currently titled in the name of (i) one Series H

common stock of Seal Beach Mutual No. Six, a California Corporation; and (ii) one active

membership certificate of Golden Rain Foundation, a California nonprofit mutual benefit corporation

(collective referred to herein as the Leisure World Stock), and direct that the current holder of such

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2015;

property deliver title to , as Successor Trustee of the

Living Trust, dated September 30, 2015.

12. Notice of Hearing. The name, age, relationship and addresses of all parties entitled to

notice of this petition pursuant to Probate Code § 851 are as follows:

Name and Relationship Age Address

[INFORMATION DELETED]

13. No Requests for Special Notice. There are no requests for special notice on file herein.

WHEREFORE, Petitioner prays for an order:

1. Confirming as Trust property all right, title and ownership of the following property

currently titled in the name of : (i) one Series H common stock of Seal Beach

Mutual No. Six, a California Corporation; and (ii) one active membership certificate of Golden Rain

Foundation, a California nonprofit mutual benefit corporation (collective referred to herein as the

Leisure World Stock), and directing that the current holder of such property deliver title to

, as Successor Trustee of the Living Trust, dated September 30,

2. For all other orders the Court deems just and proper.

VELASCO LAW GROUP, APC

Dated: February 5, 2018 By: Paul D. Velasco, Esq., Attorneys for Petitioner, Successor Trustee

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VERIFICATION

I, , as Successor Trustee of the Living Trust,

dated September 30, 2015, declare as follows:

I am the Petitioner in the above-entitled matter and have read the foregoing PETITION FOR

ORDER CONFIRMING TRUST ASSETS, and know the contents thereof The same is true of my

own knowledge, except as to those matters which are therein alleged on information and belief, and as

to those matters, I believe them to be true.

I declare under penalty of perjury under the laws of the State of California that the foregoing is

true and correct.

Dated this day of 2018, at

California.

Successor Trustee

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Case No.:

SUPPLEMENT TO PETITION FOR ORDER CONFIRMING TRUST ASSETS

(California Probate Code §850(a)(3))

DATE: May 20, 2018 TIME: 8:30 a.m. DEPT: 27

In Re:

The LIVING TRUST, dated September 30, 2013.

Paul D. Velasco, Esq., SBN: 192421 Peter A. Sahin, Esq., SBN: 222207 VELASCO LAW GROUP, a Professional Corporation 333 W. Broadway, Suite 100 Long Beach, CA 90802 (562) 432-5541 Phone (562) 432-5581 Fax

Attorneys for Petitioner and Trustee of the

Living Trust

SUPERIOR COURT OF CALIFORNIA

COUNTY OF LOS ANGELES

CENTRAL DISTRICT

Petitioner, as Successor Trustee of the Living

Trust, dated September 30, 2015 (hereafter referred to as the "Trust"), hereby supplements her

PETITION FOR ORDER CONFIRMING TRUST ASSETS as follows:

1. Probate Note A — Points and Authorities in Support of Confirming After Acquired

Assets as Trust Assets. Petitioner asserts that it would be proper for the Court to grant this petition

confirming the Leisure World Stock, as a Trust asset, despite the fact this property was acquired after

execution of the Trust instrument.

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California Probate Code §21102(a) provides, "[t]he intention of the transferor as expressed in

the instrument controls the legal effect of the dispositions made in the instrument." Although the

intent of the testator is paramount, that intent must be reflected by some words in the will. See Estate

of Dye (2001) 92 CA4th 966, 976; Estate of Sinioncini (1991) 229 CA3d 881, 889. The Probate Code

further provides that, "[Ole words of an instrument are to receive an interpretation that will give every

expression some effect, rather than one that will render any of the expressions inoperative." Probate

Code §21120. Finally, 141 parts of an instrument are to be construed in relation to each other and so

as, if possible, to form a consistent whole." Probate Code §21121. The above statutes and case law

regarding interpretation of testamentary instruments provide this Court with authority to enforce the

written expressions of the Settlor in this case.

The clear written expression of Settlor was to liberally apply the holding from Estate of

Heggstad to avoid probate through confirmation of title to the Trust, following the death of the Settlor,

for assets existing at the time of execution of the Trust and for after acquired assets. In Section 1.3 of

the Trust, such intent is expressed by Settlor as follows, "Nile secondary purpose of this trust is the

avoidance of probate. The settlor will make best efforts to properly fund this trust and maintain proper

title to the settlor's assets during the settlor's lifetime in order to achieve that purpose. However, the

settlor also recognizes that from time to time, either through error or inadvertence, title to certain

assets may not properly reflect trust ownership. Therefore, if at any time in the future, it becomes

necessary to initiate a court proceeding to determine title to certain assets of the settlor, whether

currently owned or hereafter acquired, due to the fact that title is not properly reflected in the name

of the trust, the settlor requests that the court liberally construe the settlor's intent to avoid

probate and make an order (in accordance with the court's holding in Estate of Heggstad (1993)

16 CA4th 943) determining that such assets are part of the trust estate, to be held administered

and distributed pursuant to the terms of this trust instrument, as may be amended from time to time."

(Emphasis added).

///

///

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Petitioner respectfully requests that this court honor the clearly expressed intent of the Settlor

to liberally apply the holding in the Estate of Heggstad to confirm as a Trust asset the after-acquired

property that is the subject of this Petition in order to fulfill one of the main purposes of the Settlor in

establishing the Trust; namely, the avoidance of probate.

Furthermore, it should be noted that granting the Petition would not alter, or in any way affect,

the ultimate distribution of the Leisure World Stock because the Settlor also executed a pour over will,

which provides that all assets of the Settlor are to be distributed to the successor trustee of the Trust, to

be held, administered and distributed pursuant to the terms thereof. Therefore, in addition to honoring

the Settlor's desire to avoid a probate of his estate, the granting of this Petition would also promote

efficiency of Court resources by avoiding the unnecessary filing of a petition for probate and the time

delays, costs and expenses of administration associated therewith.


Dated: May 9, 2018 By: Peter A. Sahin, Esq., Attorneys for Petitioner, Successor Trustee

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APPENDIX 4

Clarifying Intent Re: Joint Accounts and POD/TOD Beneficiaries

OPTION FOR SCHEDULE OF ASSETS:

1. All funds held in any and all accounts at USA BANK in the name of either or both seniors, except the following: (1) accounts held in joint tenancy between the settiors and any other person or persons and/or accounts for which there is a designated beneficiary or pay on death payee who survives the surviving settlor; (2) tax deferred savings plans, including, without limitation, IRA, 401(k), pension, profit-sharing, Keogh and qualified and non-qualified annuities; and (3) accounts of either settlor which have been or are hereafter transferred to a separate property trust established by either settlor.

OPTIONAL TRUST PROVISIONS RE: SETTLOR'S INTENT —BANK PROVISIONS:

OPTION 1:

5.1. Settlor's Intent Regarding Bank Accounts With Designated Beneficiary or Pay on Death Payee. The settlor has established accounts at Bank (and may establish similar accounts in the future at this or other financial institutions) that are held "in trust for" certain individuals, or which for which there is a designated beneficiary or pay on death payee. If the designated beneficiary or pay on death payee survives the settlor, such account(s) shall not be considered to be part of the trust estate; rather, it is the settlor's intent that funds held in such account(s) be distributed at the settlor's death in accordance with terms of the contract with the financial institution. However, if the designated beneficiary (or beneficiaries) fail to survive the settlor, then such account(s) shall be deemed part of this trust estate, to be held, administered and distributed according to the terms of this trust instrument following the death of the settlor.

OPTION 2:

5.1. Settlor's Intent Regarding Distribution of Funds Held in Bank Accounts. During the settlor's lifetime, she may maintain bank accounts jointly between herself and other persons (which accounts may be established prior to or following the execution of this trust). However, the settlor hereby acknowledges that such titling is for convenience only in order to give the joint owner access to the account(s) during the settlor's lifetime for the benefit of the settlor. Therefore, notwithstanding the terms of the bank contracts establishing joint account(s), the settlor considers all joint account(s) to be part of the trust estate; as such, upon her death, all funds remaining in such accounts shall be held, administered and distributed pursuant to the terms of this trust instrument. To that end, all joint account holders are hereby instructed to transfer the entire remaining balance held in such accounts at the time of the settlor's death to the trustee of this trust and the trustee is authorized to take appropriate legal action, if necessary, to carry out the settlor's expressed intent, including, without limitation, adjusting the joint account holder's distributive share of the trust estate to account for funds that the joint account holder received from the account(s), as of the date of the settlor's death, as a result of the joint tenancy titling.

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APPENDIX 5

Trustee Compensation — Sample Provisions

OPTION 1 (Reasonable Comp/Fee Schedule):

Compensation of Trustees. Each individual who is a trustee under this instrument shall be entitled to reasonable compensation for services rendered, payable without court order. If a corporation, bank or trust company shall act as trustee, it shall be entitled to compensation in accordance with its fee schedules in effect and from time to time existing, but in no event to exceed the fee customarily charged by other corporations, banks and trust companies doing business in the same county as the trustee for administration of similar trusts and similar portfolios.

OPTION 2 (1% Fixed Fee on Annual Basis):

Compensation of Individual Trustees. Each individual who is a trustee under this instrument shall be entitled to receive an annual fee equal to one percent (1%) of the average fair market value of trust principal subject to administration by the trustee, as determined on an annual basis, for all services rendered by the trustee during the year, payable without court order. If the trustee serves for only part of a calendar year, the annual compensation shall be prorated according to the number of days during that year that the trustee was acting as trustee.

OPTION 3 (Hourly Rate):

Compensation of Individual Trustees. Each individual who is a trustee under this instrument shall be entitled to receive compensation, payable without court order, at the rate of $ per hour. The trustee shall maintain a written record of each activity performed in his or her role as trustee, with a detailed description of the services rendered, the date on which the services were provided, and the amount of time spent on each particular activity.

OPTION 4 (Limitation Requested by Client)

Compensation of Individual Trustees. Following the death of the settlor, each individual who is a trustee under this instrument shall be entitled to a one-time fee for his or her trustee services, payable without court order. The fee shall be paid at the end of the first year of service as trustee and shall be equal to one percent (1%) of the average gross fair market value of trust principal subject to administration by the trustee during the trustee's first year of service, commencing from the date of the trustee's written acceptance to serve as trustee. The trustee shall not be entitled to compensation for services rendered after the first year of service.

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*pAuL, D. VELASCO, ESQ.

*PETER A. SAHIN, ESQ

DANA M. CANNON, ESQ.

ROSA M. FREGOSO, ESQ.

LAURA N. ZOLNEKOFF, ESQ.

RAN-ION LAMELAS, ESQ.

MAIL CORRESPONDENCE TO:

MAIN OFFICE

333 W. BROADWAY, STE.100

LONG BEACH, CA 90802

APPENDIX 6

MISTY L. COLWELL, OF COUNSEL

**RI CHA RD J. RADCLIFFE, OF COUNSEL

SINDEE M. SMOLOWITZ, OF COUNSEL

**Certified Specialist Appellate Law

State Bar of California Board of Legal Specialization

*Certified Specialist Estate Planning, Probate & Trust Law State Bar of California Board of Legal Specialization

TELEPHONE: 562.432.5541 OR 714.567.9266

FAX: 562.432.5581 OR 714.567.9265

E-MAIL: [email protected]

VELASCO LAW GROUP

A PROFESSIONAL CORPORATION

TRUST ADMINISTRATION MEMORANDUM

I. INTRODUCTION

Most of my clients have had little experience dealing with living trusts, much less the administration of a living trust after the death of the settlor of the trust. The purpose of this memorandum is to attempt to answer many of the questions you will have by providing a general overview of how trusts work, and your duties and responsibilities as Trustee.

Through my experience in helping people administer trusts after the passing of a loved one, I have found that many individuals have unrealistic expectations concerning the way living trusts operate following a death. People have been misled by the concept of "probate avoidance" into believing that nothing need be done upon the death of a person who established a living trust during life. It is generally true that avoiding probate significantly reduces the costs, time and burden of estate administration, but unfortunately it does not eliminate these things altogether. Even without probate many administrative chores must be completed, legal documents prepared, tax returns filed, and other matters dealt with that take time and cost money.

II. TRUSTS IN GENERAL

A. What is a Trust?

In a nutshell, a trust is a legal relationship created under a trust document in which one party, the Trustee, holds and manages property owned by another party, the Settlor, for the benefit of a 3rd party, the Beneficiary.

I) The Settlor is the creator of the trust document and the original owner of the trust property. In some trust documents, the Settlor is referred to as a "Grantor", "Trustor", or "Creator".

2) The Trustee is the manager or administrator of the trust, and has a legal duty to manage the property in the best interest of the beneficiary according to the rules

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described in the trust document. Multiple trustees are referred to as "Cotrustees".

3) The Beneficiary is entitled to the benefits of the trust property. There are usually several Beneficiaries of a trust upon the death of the Settlor. Note that a Beneficiary may also be, and often is, a Trustee as well. However, it should always be remembered that there is a significant legal difference between the two roles.

Most cases involve multiple Settlors, Trustees and/or Beneficiaries. However, for simplicity this memorandum refers to these parties in the singular.

B. Living Trusts and Probate Avoidance

You may have heard that "living trusts avoid probate", which is true so long as the trust was funded during the lifetime of the Settlor. A Settlor funds a trust by transferring ownership of his or her assets into the name of the trust. Probate is not avoided for those assets not transferred into the trust prior to the death of the Settlor. Whether or not an asset has been transferred into a trust can generally be determined by referring to the asset's title documents or other records such as a bank statement, stock certificate or real estate deed. The name of the trust will generally appear on the title document if the asset was transferred into the trust (but not always). We will assist you in determining whether each asset was transferred into the trust, and whether a probate will be required.

As stated above, living trusts avoid probate with respect to those assets the Settlor transferred into the living trust before death. However, even if probate is avoided there is generally still legal work to do. For example, in most cases assets must still be collected and managed pending distribution to the beneficiaries, appraisals of assets must be obtained, debts and taxes must be paid, tax returns must be filed, and legal documents must be prepared in connection with the distribution of the trust property to the beneficiaries. In fact, these activities are very similar to probate. The major difference is that with a living trust everything is handled privately, without court supervision, which generally results in a faster, smoother and less expensive estate process.

Thus, it should be understood by all interested parties that post-death administration of a living trust will take time and cost money, such as legal fees, accounting fees, asset transfer fees, and your own trustee fees if you decide to accept any. However, in comparison to probate, the costs and delays are substantially reduced, often resulting in time savings of months and costs savings of 50 to 90 percent.

C. Court Involvement

There is also a popular misconception that the existence of a living trust avoids all possibility of court involvement. It is true that trusts generally avoid court involvement, but not always. In certain circumstances it becomes necessary or desirable for a trustee or beneficiary to petition the court for supervision or instruction, or to resolve a dispute between the parties to the trust.

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III. ADMINISTRATION OF THE LIVING TRUST

After the Settlor's death, the trust continues as a management and distribution vehicle that will exist only as long as is necessary to identify and collect trust assets, pay debts and taxes, and distribute the trust assets to the Beneficiaries (either outright or in further trust, depending on the terms of the Trust). You might visualize this trust as a funnel through which all of the trust assets will pass to the Beneficiaries. As Successor Trustee, it is your job to collect and manage the trust's assets, appraise the trust property, pay all taxes and expenses relating to the administration of the trust, and distribute the trust property according to the Settlor's instructions in the document.

IV. POUR-OVER WILLS

A pour-over will is simply a will that names the trust as beneficiary under the will. It only becomes necessary when a Settlor failed to transfer one or more assets into the trust during lifetime, in which case a pour-over will directs the probate court to transfer such assets into the trust after death. However, as alluded to above, a formal probate will generally be required before the post-death transfer into the trust can take place. However, if the combined value of assets outside the trust is $150,000 or less, then a pour-over will permits a trustee to collect such assets by affidavit without a formal probate proceeding (but you must wait 40 days until after the Settlor's death to do so). As stated above, we will assist you in determining whether each asset was transferred into the trust, and whether a probate or affidavit will be required.

V. DISTRIBUTIONS OF PROPERTY

A. Tangible Personal Property

Provided the Beneficiaries are in agreement, the distribution of tangible personal property may be handled informally and an attorney need not get involved. If a disagreement develops, however, the division of personal property should be handled in a more formal manner. I recommend that you carefully list the tangible personal property available for distribution and to whom it is ultimately distributed. One way to document the property on hand is to videotape or photograph the household property before distribution.

Before allowing the distribution of any items of personal property, however, please note that you are responsible for reporting such items on a federal estate tax return, if required (see below). Furthermore, if any items of property (or group of items that constitutes a single collection) have a fair market value of $3,000 or more, these items must be separately appraised for federal estate tax purposes. You should therefore keep careful records of what assets are distributed and to whom, and you should obtain any required appraisals before distributing particularly valuable items.

B. Other Distributions From the Trust

In general you will not want to make distributions to the beneficiaries from Trust assets until all or nearly all of the administrative tasks are completed and you are certain that creditors

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and taxes have been properly paid. Where appropriate reserves are established, a preliminary distribution of Trust assets may be made if the need or desire exists. Please notify me prior to making any distributions from the Trust.

Whenever a distribution is made, you will most likely need to retain a sufficient reserve to meet future expenses, including unknown or unforeseen expenses that might conceivably arise. These might include the expenses of future income tax preparation fees and taxes, or a future estate tax or income tax audit. I will help you determine an appropriate amount to hold as a reserve when the time comes. The reserve should be maintained in a trust bank account.

It is customary to conclude administration by providing the Beneficiaries with a Trustee Report and Accounting, accompanied by a Release to be signed by the Beneficiaries releasing you for all of your actions as Trustee. Doing so protects you from later claims concerning your management of the Trust. I will prepare these documents at the appropriate time. You will not want to make final distribution of Trust assets until you have presented these documents to the Beneficiaries and obtain a signed release from each of them.

VI. TRUSTEE DUTIES, POWERS, AND COMPENSATION

A. Standard of Trust Management

As Trustee, you will act in a fiduciary capacity, which means that you owe certain legal duties to the Beneficiaries, as explained in more detail below. In managing the trust property, you must use at least ordinary business ability. However, if you have special skills, under California law you will be held to a higher standard of care. In any event, your management will be judged in light of the circumstances existing at the time transactions occur, rather than with the benefit of hindsight. If you exceed your trustee powers, you may be held liable for loss or damage to the trust estate.

B. Source of Trustee Powers

It is important that you understand the rules under which you must operate. These rules are derived from three sources: (1) the trust itself, (2) the California Probate Code, and (3) case law created by the courts.

The principal source of your Trustee powers is the trust itself. You should therefore read the trust carefully. In doing so, you will see that the trust contains two types of provisions: (1) Dispositive Provisions that govern the distribution of property and (2) Administrative Provisions that govern the powers of the Trustee, payment of taxes and expenses, rules for interpreting the trust document, and other procedural issues. The bulk of the trust is made up of these administrative provisions.

C. General Duties of Trustee

Your basic duties as Trustee involve collection, management, and investment of trust assets and the accumulation and distribution of income and principal under the trust. Another important set of duties relates to tax matters, explained in detail in a later section of the memorandum.

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It is a fundamental principle of trust law that you must be faithful to the interests of the trust and its Beneficiaries. You occupy a position of trust and confidence and owe a duty of care to the beneficiaries. You have a duty to administer the trust solely in the interest of the Beneficiaries and to deal impartially with them. You cannot use the trust property for your own profit or for any nontrust purpose. You must not engage in any transaction that will result in a conflict of interest between you and the trust or a Beneficiary.

You have a duty to take reasonable steps to take and keep control of trust property and to preserve the trust property and make it productive, including the procurement of sufficient property insurance. You must not commingle trust property with your own property under any circumstances. You also have a duty to take reasonable steps to enforce claims of the trust and to defend lawsuits brought against the trust.

You must carry out all Trustee activities personally. In other words, you may not delegate your responsibilities to others. However, you may hire attorneys, accountants, investment advisors, and others to consult with you concerning your administration of the trust. Nevertheless, you will ultimately be held responsible for you acts or omissions.

D. Trust Investments

The trust grants you broad discretion in investing trust assets. Even though these broad powers are granted to you, you must exercise these powers in the best interests of the trust and the Beneficiaries. The broad grant of investment discretion will not shield you from liability if you do not exercise this power reasonably. If you have any questions about the propriety of any investment, you should seek the advice of a professional before making or continuing the investment.

E. Providing Information to Beneficiaries

Under California Probate Code §16060, you owe a duty to the beneficiaries to keep them aware of the existence of the trust and to keep them reasonably informed of the trust and its administration. This duty begins with the Notification by Trustee requirement under California Probate Code §16061.7, which I will prepare and send to the Beneficiaries.

California law also requires that you provide the Beneficiaries with certain information on reasonable request and that you give a full report and accounting of all transactions not less often than annually or at the termination of the trust, unless the trust document or a Beneficiary waives this requirement in writing.

F. Recordkeeping

In order to fulfill your accounting requirements, it is very important that you keep careful records of all trust transactions. In particular, you must keep an accurate bookkeeping ledger with descriptive notations of all income and receipts, noting for each entry the date, the person to or from whom payment was made or received, the nature of the payment, and the amount. I can provide you with a simple Trust Account Ledger which may be used for this purpose. However, if the trust is complex or involves a large number of transactions, you may use an accounting software program such as Quicken or Quickbooks if you prefer. Alternatively, you may hire a bookkeeper to keep your records if your wish.

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G. Central Trust Checking Account

If you have not already done so, you should immediately open a new checking account with a financial institution of your choice in your name as Trustee of the trust. To do this, you will need to take a Trust Certification, which I have provided, to the bank. Do not use your own social security number or that of the decedent on this account. You should instead use the employer identification number that will be, or already has been, obtained for the trust. All trust expenses should be paid from, and all trust income should be deposited to, this central trust checking account.

H. Trustee Compensation

Unless the trust states otherwise, you are entitled to reasonable compensation for your services as Trustee. In determining reasonableness, factors such as the amount of time spent in trust administration and the size of the trust estate may be considered. You do not have to accept a Trustee fee, but you are entitled to one (unless otherwise stated in the trust). It is important to note that any Trustee compensation you accept is reportable as taxable income to you. We strongly recommend that you keep a written record for each activity you perform as trustee, detailing the services rendered, the date on which the services were provided, and the amount of time spent on each particular activity.

VII. TAX MATTERS

A. Taxpayer Identification Number

While the Settlor of a Trust is alive and acting as his or her own Trustee, the Settlor's SSN is the proper tax identification number of the trust for income tax purposes. However, it is now necessary to obtain and use a new Federal Tax Identification Number for income tax purposes.

The new Federal Tax Identification Number for the Smith Family Trust, dated July 5, 2014 is: 84-457897.

You should transfer the title on all bank and brokerage accounts standing in the name of the Settlor (or other prior trustee(s)) to your name as Trustee of the trust. The exact titling language is provided for you on the Trust Certification. Use only the new tax identification number on the accounts and not the Settlor's or your social security number.

B. IRS Notice Concerning Fiduciary Relationship

Federal and state laws require that the respective taxing authorities be notified of the existence of a new trust or a change in Trustee. Because the trust is now irrevocable and has become a separate taxable entity, we must notify the taxing authorities of its existence. This is done by way a "Notice Concerning Fiduciary Relationship" (IRS Form 56). Please contact your CPA or tax advisor to prepare this notice for you.

C. Estate and Gift Taxes

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The 2010 Tax Act reinstated the estate tax and the American Taxpayer Relief Act of 2012 increased the amount exempted by the estate and gift tax unified credit (exemption) to $5 million, which was indexed for inflation. The Tax Cuts and Jobs Act of 2017 increased the exemption to $11 million, which was also indexed for inflation. Therefore, the estate and gift tax unified credit was increased to $11,400,000 for deaths that occurred in 2019.

D. Income Taxes

1.Income Tax Basis

For federal and state income tax purposes, all of the property in the trust will receive a new income tax basis equal to the fair market value at the date of death (or the alternate valuation date, as explained above). This new basis is the measuring point for any capital gains upon the later sale of the inherited property by either you or a Beneficiary after distribution. It is also the measuring point for any depreciation deductions pending administration.

2. Income Tax Consequences to Beneficiaries

All property received by inheritance, including property distributed from a living trust, is received free of income tax. However, some income tax consequences to the Beneficiaries should be noted. One such consequence is that the basis of assets received on distribution will the date of death value (or alternate value), as explained above. The income tax basis of assets received will determine the capital gain a beneficiary will realize if and when the beneficiary sells an inherited asset.

In addition, the Beneficiaries must be aware that the distribution of trust assets will carry out to the Beneficiaries income earned by the trust during the period of trust administration, which will become reportable on the beneficiaries' own individual tax returns. The trust will supply the Beneficiaries with K-1's reporting the amount of income passed through to the Beneficiaries. If the Beneficiaries have already filed their returns for a taxable year before obtaining K-1's, they will be required to file amended returns.

3. Decedent's Final Personal Income Tax Returns

You are responsible for filing the decedent's final personal income tax returns, IRS forms 1040 and 540, and payment of any taxes due. If the decedent was making estimated tax payments for the year of death then you should verify that these were timely made and possibly may need to make a further payment. You will need to discuss these and all other income tax issues with an income tax preparer. I will refer a Certified Public Accountant to you upon request.

4. Fiduciary Income Tax Returns

As Trustee you must file fiduciary tax returns, IRS forms 1041 and 541, for any year or part of a year in which the Trust earned income in excess of the filing requirements. These special returns require an income tax preparer experienced in this area. I will be glad to refer one to you if you would like.

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VIII. ATTORNEYS' ROLE

As your attorney, my job is to assist and guide you in carrying out your duties as Trustee as described in this memo. I will help you collect and value assets, pay debts and taxes, and prepare the necessary transfer documents in connection with the eventual distribution of trust property to the Beneficiaries. I will also prepare a Trustee Report and Accounting to be given to the Beneficiaries and prepare any required estate tax returns if you have retained me to do so. However, I do not prepare income tax returns so it is important that you consult with a qualified income tax preparer soon. If any court action is required, I will represent you in that action if retained to do so. The exact nature and scope of my services is set forth in the separate Attorney-Client Fee Agreement.

IX. CONCLUSION

This memo is intended to serve as an overview of the trust administration process and you duties as Trustee. It is not intended to anticipate every possible question or problem that may arise during the course of administration of the trust. As questions arise throughout the administration process, please do not hesitate to contact me or my paralegal, Elise K. Zytowski by phone or email.

Sincerely,

Paul D. Velasco, Esq.

ACKNOWLEDGMENT OF RECEIPT BY TRUSTEE

I, Cynthia S. Smith, as trustee of the Smith Family Trust, dated July 5, 2014, hereby acknowledge that I have received the foregoing Trust Administration Memorandum from my attorney and that he has reviewed it with me in detail. I further acknowledge that my attorney has strongly recommended that I read and study this Memorandum in detail so that I may be aware of and familiar with my duties and responsibilities as trustee.

Dated: September 5, 2019 Signature

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APPENDIX 7

SAMPLE PROVISIONS FOR VLG "HYBRID TRUST"

REPLACE 3.2 WITH THE FOLLOWING

3.2. Power of Revocation and Amendment After Death of Deceased Settlor; Intent of the

Settlors. After the death of the deceased settlor, the Survivor's Trust may not be revoked or

terminated in its entirety and may be amended, in part, only as provided herein. After the death

of the deceased settlor, the surviving settlor may at any time amend the Survivor's Trust, except

that the surviving settlor may not modify, revoke or amend any gift or share to be distributed,

following the death of the surviving settlor, pursuant to the other provisions of this trust

instrument, to the beneficiaries of the deceased settlor, as identified in Section 6.3 below. For

example, the surviving settlor shall have the power to amend the administrative provisions of this

trust instrument, including, without limitation, the power to remove and replace successor

trustees, to amend the powers of the trustee and other administrative provisions, including the

age at which a child or issue of the settlor may act as trustee of the separate share trust to be

established for such child or issue upon the death of the surviving settlor; provided that, such

amendment does not reduce the share of any child or other issue of the settlors according to the

provisions of the trust that are in effect on the date of the deceased settlor's death. The surviving

settlor may also amend or modibi, in whole, or in part, any gift or share to be distributed,

following the death of the surviving settlor, pursuant to the other provisions of this trust

instrument, to the beneficiaries of the surviving settlor, as identified in Section 6.3 below

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After the death of the surviving settlor, none of the trusts created by this instrument may

be amended, revoked, or terminated.

After much thought, deliberation and discussion, the settlors have agreed upon a plan for

the administration of the trust upon the death of the first settlor and final distribution of the trust

estate upon the death of both settlors, as set forth in Article Six. The settlors want the surviving

settlor to have complete discretion to use the trust property for the surviving settlor 's benefit

during the surviving settlor 's lifetime, in the sole discretion of the surviving settlor, while

ensuring that upon the death of the surviving settlor, one-half (1/2) of the remaining trust

property will be distributed in accordance with the dispositive wishes of the deceased settlor, as

provided in Section 6.3 below, but without requiring the creation of a separate irrevocable (e.g.,

bypass, credit-shelter or decedent's) trust upon the death of the deceased settlor. The intent of

the settlors in prohibiting the termination or revocation of the Survivor's Trust in its entirety and

limiting the surviving settlor 's power to amend the Survivor 's Trust after the death of the

deceased settlor is to ensure that the surviving settlor cannot unilaterally alter the plan for final

distribution to the deceased settlor 's beneficiaries following the death of the surviving settlor.

MUST ALSO DELETE SECTION 6.1(c)

(c) Right of Surviving Settlor to Withdraw Principal. The trustee shall pay to the surviving ettlor as much of the trust principal as the surviving settlor may from time to time demand in a

signed writing delivered to the trustee.

MUST ALSO DELETE SECTION 6.1(d):

(d) General Power of Appointment. On the death of the surviving settlor, subject to the

but not collected by the trustee) shall be paid over and delivered to any entity or entities, person eflaefsens7-and-ol+-a-n-Y-tfust, terms, and Elitions--etr-449--ef4n-faver-of the the-survi-v-ing settlor, as the surviving settlor may direct by will, trust, . other written •

, provided

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only that no exercise of this power of appointment shall be effective unless it refers to this instrument and expressly indicates an intention to exercise this poweref-atapeintment,—The trustee may rely on any will (whether or not admitted te probate), trust or other written instrument that on its face appears to be a valid exercise of the beneficiary's power of appointment and shall not be liable for any good faith act in reliance on that will or written instrument, even if for any reason it is later determined to be invalid with respect to its purported exercise of this power of appointment. If the trustee receives no notice within six (6) months after the beneficiary's death of the existence of a will or other written instrument by the beneficiary purporting to exercise the power of appointment, the trustee may distribute the trust property as though this power of appointment had not been exercised and shall in that -vent be conclusively presumed to have acted in good faith, even if a valid will or other written instrument is thereafter discovered.

ADMINISTRATION OF SURVIVOR'S TRUST DURING SURVIVOR'S LIFETIME:

6.1. Survivor's Trust. The trustee shall hold, administer, and distribute the assets of the

Survivor's Trust as follows:

(a) Payment of Income. The trustee shall pay to or apply for the benefit of the surviving settlor, so long as the surviving settlor lives, the entire net income of the trust, in monthly or other convenient installments agreed on by the surviving settlor and the trustee, but not less often than annually. In determining the net income of the trust distributable to the surviving settlor, the trustee shall include all income that must be considered as income in order for the trust to qualify for the marital deduction under the federal estate tax law, and shall make no deductions from gross income that would prevent the trust from qualifying for that marital deduction, notwithstanding any contrary provisions of this instrument or any applicable provisions of state law. It is the intention of the settlors that the trust produce for the surviving settlor during his or her lifetime the income, or that the surviving settlor shall have the benefit of the trust property, as is consistent with the value of the trust property and with its preservation.

(b) Discretionary Payment of Principal by Trustee; Intention of the Settlors. At any time or times during the trust term, the trustee shall pay to or apply for the benefit of the surviving settlor so much of the principal of the trust as the trustee deems proper for the comfort, welfare, and happiness of the surviving settlor. In exercising discretion, the trustee shall give the consideration that the trustee deems proper to all other income and resources that are then known to the trustee and that are readily available to the surviving settlor. All decisions of the trustee regarding payments under this subsection, if any, are within the trustee's reasonable discretion.

It is the intention of the settlors that the surviving settlor, as the beneficiary of a marital deduction trust, shall have substantially that degree of beneficial enjoyment of the trust during his or her lifetime that the principles of the law of

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trusts accord to a person who is unqualifiedly designated as the life beneficiary of a trust, and the trustee shall not exercise the trustee's discretion in a manner that is not in accord with this expressed intention. While the settlors do not wish to limit the surviving settlor's right to use, consume and enjoy the trust property according to any particular ascertainable standard (such as, "health, support, maintenance or education") during the surviving settlor's lifetime, the surviving settlor may not remove property from the trust for the purpose of benefitting anyone other than the surviving settlor during the surviving settlor's lifetime, or where it may be distributed on the death of the surviving settlor to individuals other than the individual beneficiaries of this trust according to the provisions of Section 6.3 below, except as may be amended or modified by the surviving settlor in accordance with the other provisions of this trust instrument.

(c) No Right of Surviving Settlor to Withdraw Principal. The trustee may not withdraw principal from the trust estate for any purpose other than to provide for the needs of the surviving settlor and support the lifestyle of the surviving settlor in accordance with the provisions of subparagraph (b) above.

(d) Power to Substitute Property. Notwithstanding any provision in this trust instrument to the contrary, the settlors shall have the power, exercisable in a non-fiduciary capacity, and without the approval or consent of any other person (including any person acting in a fiduciary capacity), to reacquire trust assets by substituting for such assets other assets of an equivalent value. For this purpose, equivalent value shall be determined by the appraisal of an independent appraiser who is experienced in the appraisal of, and otherwise qualified to appraise, properties of a similar type. The settlors shall bear the cost of any such appraisal or appraisals.

(e) Tax Consequences to Surviving Settlor. The settlors acknowledge and agree that the surviving settlor will be treated as the owner of the trust estate of the Survivor's Trust for income tax purposes under Sections 671 et seq. of the Internal Revenue Code and the comparable provisions of state law and, as a consequence, will be required to take into account the income, gains, losses and deductions of the trust in computing the surviving settlor's individual income tax liability.

(f) Payment of Taxes. Debts and Expenses. On the death of the surviving settlor and subject to any power of appointment exercised by him or her, the trustee, in the trustee's discretion, may pay out of the income or principal (or partly from each) of the Survivor's Trust the taxes, debts and expenses (as defined in Article Eight) arising on the death of the surviving settlor unless the trustee determines that other adequate provisions have been made for the payment of these taxes, debts and expenses.

(g) Payment of Federal Estate Taxes. The trustee shall determine from the personal representative of the estate of the surviving settlor the amount of the

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federal estate tax allocable to the property of the trust by reason of Internal Revenue Code Section 2207 and shall set aside a portion of the trust principal for the purpose of paying that tax upon written demand of the personal representative.

(h) Final Distribution. On the death of the surviving settlor, after payment of any taxes, debts, and expenses pursuant to the applicable provisions of this instrument, the remaining trust property shall be distributed in the manner specified in Section 6.3 applicable to the remainder provisions of the Survivor's Trust.

SAMPLE DISPOSITIVE PROVISION FOR FINAL DISTRIBUTION:

6.2. Disposition of Survivor's Trust on Death of Surviving Settlor. On the death of the

surviving settlor, the trustee shall divide the remaining property of the Survivor's Trust into

shares in the following manner. Each share and/or subshare shall be distributed outright and free

of trust unless otherwise stated below.

(a) If the trust (including any subtrust created hereunder) is named as the beneficiary of: (i) any life insurance policy in which either or both settlors are the insured; (ii) any tax deferred or retirement savings plans, including, without limitation, IRA, 401(k), pension, profit sharing, Keogh and qualified and non-qualified annuities; (iii) any bank and/or brokerage accounts held at any financial institution, then upon the death of the surviving settlor, the trustee shall distribute such proceeds, along with the remaining trust property, as set forth below in this Section 6.3.

(b) A share of one-half (1/2) of the total trust property, shall be distributed to the beneficiaries of STEVEN SMITH, as follows:

(1) If any issue of the settlors survive the surviving settlor, the trustee shall divide the remaining trust property (including all income then accrued but uncollected and all income then remaining in the hands of the trustee) into shares among the then-living issue of the settlors, with those issue to take their shares in the manner provided in California Probate Code Section 240, as defined in the Article entitled "Concluding Provisions" of this instrument. The share created for each of those issue shall be held, administered, and distributed in a separate trust for that issue according to the terms set forth in Article Six applicable to the Separate Share Trust for Children and Issue.

(2) If none of the settlors' issue survive the surviving settlor, the remaining trust property shall be distributed outright to the heirs of STEVEN SMITH.

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(c) A share of one-half (1/2) of the total trust property, shall be distributed to the beneficiaries of LYNETTE SMITH, as follows:

(1) If any issue of the settlors survive the surviving settlor, the trustee shall divide the remaining trust property (including all income then accrued but uncollected and all income then remaining in the hands of the trustee) into shares among the then-living issue of the settlors, with those issue to take their shares in the manner provided in California Probate Code Section 240, as defined in the Article entitled "Concluding Provisions" of this instrument. The share created for each of those issue shall be held, administered, and distributed in a separate trust for that issue according to the terms set forth in Article Six applicable to the Separate Share Trust for Children and Issue.

(2) If none of the settlors' issue survive the surviving settlor, the remaining trust property shall be distributed outright to the heirs of LYNETTE SMITH.

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Executed EP Docs Transmittal Letter:

We have discussed the advantages and disadvantages of using this type of trust. Specifically, we discussed the fact that although the trust cannot be revoked by the survivor after the death of the first spouse, the survivor will have control over the entire estate during his or her lifetime and will be able to use the trust assets, in his or her sole discretion, for the survivor's "health, maintenance comfort, welfare and happiness." We also discussed the fact that while the survivor will be able to make certain changes to the Trust after the death of the first spouse, such as, changing the successor trustees and/or changing the age at which a beneficiary may assume control over his or her inheritance, the survivor may not modify or amend any gift or share to be distributed to the beneficiaries of the deceased spouse after the survivor's death.

After much thought, deliberation and discussion, you have agreed upon a plan for the administration of the trust upon the death of the first spouse and final distribution of the trust estate upon the death of both spouses. You wanted the survivor to have complete discretion to use the trust property for the survivor's benefit during the survivor's lifetime, while ensuring that upon the death of the surviving spouse, at least one-half of the remaining trust property would be distributed in accordance with the dispositive wishes of the deceased spouse, but without requiring the creation of a separate irrevocable (e.g., bypass or decedent's) trust upon the death of the first spouse. You stated that your intent in prohibiting the termination or revocation of the Survivor's Trust and limiting the survivor's power to amend the Survivor's Trust after the death of the first spouse is to ensure that the survivor cannot unilaterally alter the plan for final distribution to the deceased spouse's beneficiaries.

If this does not accurately reflect your wishes about how the trust is to be administered and distributed after your death, you should consider the other options that we discussed. As you recall, the other types of trusts we discussed give the surviving spouse less flexibility and control, but they do provide better assurance that the deceased spouse's property will distributed according to his or her wishes following the death of the surviving spouse.

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APPENDIX 8a

FAMILY AGREEMENT REGARDING TERMINATION OF IRREVOCABLE TRUSTS ESTABLISHED UNDER THE SMITH FAMILY TRUST,

DATED JANUARY 3, 2000, AS AMENDED

This Family Agreement Regarding Termination of Irrevocable Trusts Established Under the Smith Family Trust, Dated January 3, 2000, as Amended (the "Agreement") is entered into as of August , 2019 (the "Effective Date"), by and between RICHARD H. SMITH (sometimes referred to herein as the "trustor" or "surviving trustor"), and JANE R. SMITH and KEVIN N. SMITH (sometimes referred to herein as "remainder beneficiaries") (all of whom are sometimes collectively referred to herein as the "parties"), with reference to the following facts:

RECITALS

A. RICHARD H. SMITH is the surviving trustor and initial cotrustee of SMITH FAMILY TRUST, created under that certain declaration of trust by CAROL M. SMITH and RICHARD H. SMITH , as trustors (hereinafter, referred to collectively as the "trustors") and trustees, on January 3, 2000 (the "Family Trust"). A true and correct copy of the Family Trust is attached hereto as Exhibit 1.

B. CAROL M. SMITH died on December 3, 2003.

C. The section of the Family Trust entitled, "Division of the Trust and Payment of Expenses Upon Death of First Trustor," provides that upon the death of the first trustor (sometimes referred to therein as the "deceased trustor") the trustee shall divide the trust estate into four (4) separate subtrusts, referred to as the Survivor's Trust, the Exemption Trust, the Sheltered Marital Trust and the Non-Sheltered Marital Trust (sometimes referred to collectively hereunder as the "Subtrusts"), pursuant to a formula set forth in that section. Provisions for the administration and distribution of those subtrusts are also set forth in that section of the Family Trust.

D. The section of the Family Trust entitled, "Trustors' Power to Amend and Revoke This Trust," provides that after the death of the deceased trustor, the surviving trustor may at any time amend, revoke, or terminate, in whole or in part, the Survivor's Trust, but the Exemption Trust and the Marital Trusts (i.e., the Sheltered Marital Trust and Non-Sheltered Marital Trust) are irrevocable and may not be amended, revoked, or terminated after the death of the deceased trustor.

E. Following the death of the deceased trustor, the trustee allocated the assets of the Family Trust in accordance with the above-referenced provisions of the Family Trust. As a result of that allocation, the real property commonly known as 2940 Palos Verdes Drive North, Rancho Palos Verdes, California (APN: 0000-000-000) (hereinafter the "RPV Property") was allocated among the various subtrusts as follows: (i) an undivided fifteen percent (15%) interest

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to the RICHARD H. SMITH REVOCABLE SURVIVOR'S TRUST ("Survivor's Trust"); (ii) an undivided forty-eight percent (48%) interest to the CAROL M. SMITH IRREVOCABLE EXEMPTION TRUST ("Exemption Trust"); (iii) an undivided six percent (6%) interest to the CAROL M. SMITH SHELTERED MARITAL TRUST ("Sheltered Marital Trust"); and (iv) an undivided thirty-one percent (31%) interest to the CAROL M. SMITH NON-SHELTERED MARITAL TRUST ("Non-Sheltered Marital Trust"). All other assets of the trustors were allocated to the Survivor's Trust'. The sole asset of the Exemption Trust, the Sheltered Marital Trust and the Non-Sheltered Marital Trust is the ownership interest of the RPV Property allocated to such subtrusts as stated above. RICHARD H. SMITH is the currently acting trustee of the Survivor's Trust, Exemption Trust, Sheltered Marital Trust and Non-Sheltered Marital Trust.

F. RICHARD H. SMITH, as the surviving trustor, is the sole lifetime beneficiary of the Exemption Trust, the Sheltered Marital Trust and the Non-Sheltered Marital Trust.

G. JANE R. SMITH and KEVIN N. SMITH are the children of the trustors and the remainder beneficiaries of the Exemption Trust, the Sheltered Marital Trust and the Non-Sheltered Marital Trust. ASHLEY SMITH and BRIAN SMITH are the children of JANE R. SMITH and grandchildren of the trustors. JODY SMITH and JAMES SMITH are the children of KEVIN N. SMITH and grandchildren of the trustors. The terms of all subtrusts provide that if a child of the trustors predeceases the surviving trustor, such deceased child's share is to be distributed in equal shares to his or her then-living issue by right of representation.

H. Given the estate tax laws that existed at the time of the creation of the Family Trust (in 2000), it was advantageous and advisable to create a trust that provided for the funding of an Exemption Trust and Marital Trusts on the death of the first spouse to die in order to achieve greater overall estate tax savings. However, due to the changes in the estate tax laws that have occurred since that time, after consulting with his attorney and tax advisors, the surviving trustor has determined that the existence of an Exemption Trust and Marital Trusts are no longer necessary to achieve the estate tax savings that such funding was originally intended to accomplish. The surviving trustor has further determined that maintaining the Exemption Trust and Marital Trusts in their current form would result in adverse income tax consequences upon the death of the surviving trustor.

I. Notwithstanding the provisions of the Family Trust stating that the Exemption Trust, Sheltered Marital Trust and Non-Sheltered Marital Trust are irrevocable on the death of the deceased trustor, California Probate Code Section 15404 provides that if the trustor and all beneficiaries of an irrevocable trust consent, they may compel the modification or termination of the trust. The surviving trustor and remainder beneficiaries of the Family Trust now wish to exercise their rights under Probate Code Section 15404 to terminate the Exemption Trust, Sheltered Marital Trust and Non-Sheltered Marital Trust and distribute the property remaining in

1 The Survivor's Trust was amended by the surviving trustor on the following dates: April 21, 2008, June 2, 2008, November 2, 2011 and September 25, 2017. True and correct copies of the amendments are attached hereto as Exhibit 2, Exhibit 3, Exhibit 4 and Exhibit 5, respectively.

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such trusts outright to the surviving trustor. To that end, the surviving trustor and remainder beneficiaries hereby agree as follows.

AGREEMENT

1. Termination of Exemption Trust, Sheltered Marital Trust and Non-Sheltered Marital Trust and Distribution of Trust Property. Pursuant to California Probate Code Section 15404, the parties agree that, effective upon execution of this Agreement by all parties, the Exemption Trust, Sheltered Marital Trust and Non-Sheltered Marital Trust are terminated and the trustee is hereby authorized to distribute all trust property, including, without limitation, the real property interests of those subtrusts in the RPV Property, to RICHARD H. SMITH, as Trustee of the RICHARD H. SMITH REVOCABLE SURVIVOR'S TRUST, dated January 3, 2000, as amended, to be held, administered and distributed pursuant to the terms thereof.

2. Waiver of Accounting. Pursuant to California Probate Code Section 16064(b), the parties hereby waive an accounting of the Exemption Trust, Sheltered Marital Trust and Non-Sheltered Marital Trust by the trustee.

3. Binding Nature. This Agreement shall inure to the benefit of, and shall be binding upon, the parties and their respective heirs, legal representatives, successors and permitted assigns; provided, however, this Agreement shall not be assigned by either party without the express prior written consent of the other party.

4. Understanding of Agreement. The parties hereto affirm and acknowledge that each has read the Agreement and has had the opportunity to have it fully explained by independent counsel of choice, and that each party fully understands and appreciates the words and terms used in this Agreement and their effect, and agrees to all of its provisions in full and agrees to abide therewith.

5. Independent Representation; Free and Voluntary Execution. In executing this Agreement, each party represents, warrants and certifies that: (i) the party fully knows, understands and approves the contents hereof, and each party executes this Agreement voluntarily and of each party's own free will; (ii) each party has had the opportunity and has been advised by the surviving trustor's counsel to seek independent legal advice from his or her own counsel with regard to the facts, circumstances and issues described in this Agreement, and with regard to their rights or asserted rights in and to the Family Trust and all subtrusts created thereunder; (iii) the party has either received independent legal advice and representation from his or her attorney or has knowingly and voluntarily waived his or her rig2awht to seek such advice and/or representation; (iv) in executing this Agreement, each party does so with full knowledge of any and all rights which the party may have in connection with the Family Trust and all subtrusts created thereunder; (v) each party has received or has had made available to him or her all financial and other information that the party, or the party's counsel considered necessary to make an informed judgment concerning the matters and agreements contained herein; (v) each party has conducted such investigation as the party, or the party's counsel deemed appropriate and has consulted with such other independent advisors as the party, or the party's counsel deemed appropriate regarding the agreements contained herein and the party's

41

rights and released rights in connection therewith; (vi) each party has been informed and acknowledges that: (1) attorney Paul D. Velasco and the Velasco Law Group, APC represent only RICHARD H. SMITH in connection with the drafting of this Agreement and its subject matter; (2) although all parties have participated in joint discussions with Attorney Velasco regarding the terms of this Agreement and the legal effect thereof, Attorney Velasco does not, and has not purported to, represent any other party hereto; and (3) each party hereto has been advised to obtain independent legal counsel to advise the party of his or her rights hereunder and the legal effect hereof; and (vii) each party waives and relinquishes any right that the party may have to contend that the party was induced to execute this Agreement by reliance on the counsel, advice or representations of Attorney Velasco.

6. Integration. This Agreement embodies the entire agreement of the parties hereto and supersedes any and all other agreements, understandings, negotiations, or discussions, either oral or in writing, expressed or implied, between the parties to this Agreement. The parties to this Agreement each acknowledge that no representations, inducements, promises, agreements or warranties, oral or otherwise, have been made by them, or anyone acting on their behalf, which are not embodied in this Agreement; that they have not executed this Agreement in reliance on any representation, inducement, promise, agreement, warranty, fact or circumstance not expressly set forth in this Agreement; and that no representation, inducement, promise, agreement or warranty not contained in this Agreement, including but not limited to any purported supplement, modification, waiver or termination of this Agreement, shall be valid or binding, unless executed in writing by the party against whom it is sought to be enforced. This Agreement may not be amended, nor may any provision herein be waived, except in writing signed by the party against whom such amendment or waiver is sought to be enforced.

7. Severability. Should any part, term, provision or portion of this Agreement be decided by a court to be illegal or in conflict with any law of the State of California or of the United States, or otherwise be rendered unenforceable or ineffectual, the validity of the remaining parts, terms, portions, or provisions shall be deemed severable and shall not be affected thereby.

8. Recitals. The Recitals set forth herein constitute a binding and enforceable part of this Agreement.

9. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California. The venue for the settlement of any dispute arising with respect to this Agreement shall be Los Angeles County, California.

10. Counterparts/Facsimile or E-Mail Copies. This Agreement may be executed in any number of counterparts with the same effect as if all parties had signed the same document, and each such executed counterpart shall be deemed to be an original document, and all such executed counterparts together shall constitute one and the same instrument. Facsimile or e-mail copies of the signature page hereof shall be deemed to be the equivalent of an original thereof

END OF THIS PAGE

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IN WITNESS WHEREOF, the surviving trustor and remainder beneficiaries certify that they have read the foregoing Agreement and that it correctly confirms their consent to the termination of the Exemption Trust, Sheltered Marital Trust and Non-Sheltered Marital Trust and to the distribution of the ownership interests in the RPV Property currently held in such subtrusts to the RICHARD H. SMITH REVOCABLE SURVIVOR'S TRUST, dated January 3, 2000, as amended.

SURVIVING TRUS TOR-TRUSTEE

RICHARD H. SMITH

REMAINDER BENEFICIARIES

JANE R. SMITH

KEVIN N. SMITH

ASHLEY SMITH

BRIAN SMITH

JODY SMITH

JAMES SMITH

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APPENDIX 8b

FAMILY AGREEMENT REGARDING THE HAMILTION FAMILY TRUST

This Family Agreement Regarding the Hamilton Family Trust (the "Agreement") is entered into, as of January 18, 2019 (the "Effective Date"), by and between DAVID M. HAMILTION (sometimes referred to herein as the "settlor" or "surviving settlor"), and DAVID M. HAMILTION, JR., JEFFREY J. HAMILTION and BRETT W. HAMILTION (sometimes collectively referred to herein as the "Exemption Trust beneficiaries"), with reference to the following facts:

RECITALS

A. DAVID M. HAMILTION is the surviving settlor (hereinafter, "surviving settlor") and initial cotrustee of THE HAMILTION FAMILY TRUST created under that certain declaration of trust by DAVID M. HAMILTION and JAYNE M. HAMILTION, as settlors (hereinafter, referred to collectively as the "settlors") and trustees, on August 21, 1998 (the "Family Trust"). The Family Trust was amended on April 19, 2010. A true and correct copy of the Family Trust and the Amendment thereto are attached here to as Exhibit 1 and Exhibit 2, respectively. Currently, the trust estate is comprised of real property located at 4900 Rockefeller Court, Mission Viejo, California, APN: 000-000-00 (the "Mission Viejo Property"); several timeshare interests for vacation properties in Maui, Hawaii (the "timeshares"); bank accounts; brokerage accounts; a limited partnership interest; and the settlors' tangible personal property. The approximate total fair market value of the trust estate is $4.5 million.

B. DAVID M. HAMILTION, JR., JEFFREY J. HAMILTION and BRETT W. HAMILTION are the children of the settlors and the remainder beneficiaries of the Family Trust.

C. JAYNE M. HAMILTION died, on August 12, 2018.

D. Article V, Section A of the Family Trust provides that upon the death of the first settlor, the trustee shall divide the trust estate into two separate trusts, referred to as the Survivor's Trust and the Exemption Trust, pursuant to a formula set forth in that article. The Survivor's Trust is to be held, administered, and distributed by the trustee according to the terms of the Survivor's Trust as set forth in Section G of Article V of the Family Trust. The Exemption Trust is to be held, administered, and distributed according to the terms of the Exemption Trust as set forth in Section H of Article V of the Family Trust. Following the death of the deceased settlor there was no allocation of the trust estate between the Survivor's Trust and the Exemption Trust; rather, the trust assets have remained titled in the name of the Family Trust.

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E. Section C of Article III of the Family Trust provides that after the death of the deceased settlor, the surviving settlor may at any time amend or revoke any terms of the Survivor's Trust, but that the Exemption Trust may not be amended, revoked, or terminated after the death of the deceased settlor.

F. Given the estate tax laws that existed at the time of the creation of the Family Trust (in 1998), it was advantageous and advisable to create a trust that provided for the funding of an Exemption Trust on the death of the first spouse to die in order to achieve greater overall estate tax savings. However, due to the changes in the estate tax laws that have occurred since that time, after consulting with his attorney and tax advisors, the surviving settlor has determined that the funding of an Exemption Trust is no longer necessary to achieve the estate tax savings that such funding was originally intended to accomplish. The surviving settlor has further determined that the creation and funding of an Exemption Trust would be impractical, inconvenient and would even result in adverse income tax consequences upon the death of the surviving settlor.

G. Notwithstanding the provisions of the Family Trust regarding the division of the trust estate into two separate shares and the irrevocability of the Exemption Trust, California Probate Code Section 15404 provides that if the settlor and all beneficiaries of an irrevocable trust consent, they may compel the modification or termination of the trust. The surviving settlor and remainder beneficiaries of the Family Trust now wish to exercise their rights under Probate Code Section 15404 to modify the Family Trust to eliminate the requirement for the creation and funding of the Exemption Trust and allow, instead, all Family Trust assets to be held as assets of the Survivor's Trust, which may be revoked, modified or amended, in whole, or in part, by the surviving settlor. .

AGREEMENT

Now, therefore, in consideration of the mutual covenants, conditions and agreements contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by all parties to this Agreement, such parties hereto mutually agree as follows:

1. Revocation of Provisions Establishing the Exemption Trust. The parties hereby agree that, as of the Effective Date of this Agreement, the provisions in Article V requiring the allocation and partial funding of trust property into an Exemption Trust pursuant to a formula set forth in that article following the death of the deceased settlor, are revoked in their entirety. The parties further agree that all Family Trust assets shall be held, administered and distributed as assets of the Survivor's Trust, which may be revoked, modified or amended, in whole, or in part, by the surviving settlor.'

On the same date as the Effective Date of this Agreement, the settlor is executing a complete amendment and restatement of THE HAMILTON FAMILY TRUST, in which all assets of the Family Trust will be held, administered and distributed.

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2. Waiver of Accounting. Each of the remainder beneficiaries hereby forever waives his respective right to an accounting by the Trustees of THE HAMILTION FAMILY TRUST, dated August 21, 1998, and/or any subtrust created thereunder.

3. Recitals. The Parties agree that the Recitals set forth herein constitute a binding and enforceable part of this Agreement.

4. Partial Invalidity. Should any portion, word, clause, phrase, sentence or paragraph of this Agreement be declared void or unenforceable, such portion shall be considered independent and severable from the remainder, the validity of which shall remain unaffected

5. Integration. This Agreement embodies the entire agreement of the parties hereto and supersedes any and all other agreements, understandings, negotiations, or discussions, either oral or in writing, expressed or implied, between the parties to this Agreement. The parties to this Agreement each acknowledge that no representations, inducements, promises, agreements or warranties, oral or otherwise, have been made by them, or anyone acting on their behalf, which are not embodied in this Agreement; that they have not executed this Agreement in reliance on any representation, inducement, promise, agreement, warranty, fact or circumstance not expressly set forth in this Agreement; and that no representation, inducement, promise, agreement or warranty not contained in this Agreement, including but not limited to any purported supplement, modification, waiver or termination of this Agreement, shall be valid or binding, unless executed in writing by the party against whom it is sought to be enforced. This Agreement may not be amended, nor may any provision herein be waived, except in writing signed by the party against whom such amendment or waiver is sought to be enforced.

6. Binding Nature. This Agreement shall inure to the benefit of, and shall be binding upon, the parties and their respective heirs, legal representatives, successors and permitted assigns; provided, however, this Agreement shall not be assigned by either party without the express prior written consent of the other party.

7. Execution and Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one (I) and the same instrument. Signatures may be by facsimile, and shall have the same validity, effect and enforceability as if they were in original ink.

8. Governing Law and Jurisdiction. This Agreement shall be interpreted under the laws of the State of California, both as to interpretation and performance. The Superior Court for the County of Los Angeles, Stanley Mosk Courthouse, shall have jurisdiction to enforce this Agreement in accordance with the provisions of California Code of Civil Procedure Section 664.6.

END OF THIS PAGE

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The surviving settlor and remainder beneficiaries certify that they have read the foregoing Agreement and that it correctly confirms their consent to the revocation of the terms of the Family Trust that require the establishment of the Exemption Trust and to the distribution of the entire trust estate to THE HAMILTION FAMILY TRUST, as amended and restated on January 18, 2019.

SURVIVING SETTLOR-TRUSTEE

DAVID M. HAMILTION

REMAINDER BENEFICIARIES

DAVID M. HAMILTION, JR.

JEFFREY J. HAMILTION

BRETT W. HAMILTION

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EXHIBIT I

The Hamilton Family Trust

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EXHIBIT 2

First Amendment to The Hamilton Family Trust

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APPENDIX 9

VELASCO LAW GROUP, A Professional Corporation Paul D. Velasco, Esq., SBN 192421 Peter A. Sahin, Esq., SBN 222207 333 W. Broadway, Suite 100 Long Beach, California 90802 T: (562) 432-5541 F: (562) 432-5581

Attorneys for Petitioner, , Trustee

SUPERIOR COURT OF THE STATE OF CALIFORNIA

FOR THE COUNTY OF LOS ANGELES

CENTRAL DISTRICT

In Re:

Case No.:

Family Trust, dated August 12, 1991.

PETITION FOR ORDER CONFIRMING FAMILY AGREEMENT REGARDING MODIFICATION OF TRUST; OR, ALTERNATIVELY, APPROVING MODIFICATION OF TRUST

(California Probate Code §15403; §17200(b)(13); and §15409)

Date: Time: Dept:

Petitioner, , in her capacity as surviving settlor and sole trustee of the

Family Trust, dated August 12, 1991, alleges and petitions the

Court as follows:

1. Creation of the Trust. The Family Trust was

created by and , as settlors and co-trustees, under a trust

agreement dated August 12, 1991 (the "Trust). A true and correct copy of the Trust is attached

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hereto as Exhibit 1. At the time that the settlors executed the Trust, they also executed pour over

wills, which leave their entire estate to the Trust. A true and correct copy of the pour- over wills of

and are attached hereto as Exhibit 2 and Exhibit 3,

respectively.

2. Identity of Trustee and Principal Place of Administration. Settlor

died on January 2, 2015. Settlor is still living and is the surviving settlor and

sole trustee of the Trust pursuant to Article II, Section A of the Trust. The principal place of

administration of the Trust is in Los Angeles, California. As such, jurisdiction and venue are

proper. Probate Code §§ 17000, 17002(a) and 17005(a)(1).

3. Trust Assets. The Trust consists solely of the following assets: [ASSET DETAILS

INTENTIONALLY DELETED].

4. Provisions for Division of Trust on Death of Deceased Settlor. Section A of Article

V of the Trust provides that upon the death of the first settlor, the trustee shall divide the trust estate

into three separate trust shares, referred to as the "Credit Trust," "Marital Trust" and "Survivors

Trust" pursuant to a formula set forth in that section. The survivor's share is to be held,

administered, and distributed by the trustee according to the terms of the Survivor's Trust as set

forth in Article VI of the Trust. The Marital Trust and Credit Trust are to be held, administered, and

distributed as set forth in Article VI.

5. Provisions Regarding Revocation and Amendment of the Trust. Section A of

Article IV of the Trust provides that after the death of the deceased settlor, the Trust may not be

revoked by the Surviving Settlor. Section B of Article IV of the Trust provides that after the death

of the deceased settlor, the Trust may not be amended by the Surviving Settlor. However, pursuant

to section B.2 of Article VI of the Trust, the Surviving Settlor has a general power of appointment

over the assets of the Survivor's Trust to alter the dispositive provisions of the Survivor's Trust and

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dispose of the remaining property held in that trust, in the Surviving Settlor's sole and absolute

discretion, on the death of the Surviving Settlor. Furthermore, pursuant to section E.1 of Article VI

of the Trust, the Surviving Settlor also has a general power of appointment over the assets of the

Marital Trust to dispose of the remaining property held in that trust, in the Surviving Settlor's sole

and absolute discretion, on the death of the Surviving Settlor.

6. Surviving Settlor is Lifetime Beneficiary. Pursuant to the provisions of Article VI

of the Trust, the entire trust estate in to be held for the benefit of Petitioner, as the Surviving Settlor,

for her support and maintenance for her entire lifetime.

7. Remainder Beneficiaries, and were the

parents of the deceased settlor and were designated as the remainder beneficiaries of the Trust in the

event that they survived the settlors; however, they are both deceased. died on

August 24, 2008 and died on September 1, 2007. The Trust further provides that

in the event that Josephine and Angelo fail to survive the settlors, then on the death of the Surviving

Settlor, the remaining trust property is to be held in trust for the benefit of their daughter, Angela

("Angela"), with a gift in the

amount of $20,000 to be set aside for the benefit and education of the settlors' granddaughter,

Melissa ("Melissa"). Angela

and Melissa are both adults. The settlors have one other child, Steven Jr. who is also an

adult. Steven Jr. is developmentally disabled and lives in a group home funded by the Los Angeles

County Regional Center. Petitioner is Steven Jr.'s court appointed conservator of the person. As

the last paragraph of Article VI, Section F of the Trust provides, the settlors chose to make no

provision for Steven Jr. in the Trust.

8. Settlors' Intent in Creating the Trust. The primary purpose of the settlors in the

establishment of the Trust was to create a plan for the management and distribution of the Trust

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property at time of their respective deaths in a manner that avoids probate, minimizes death taxes

and adverse income tax consequences, and maximizes the amount that can be passed along to their

children and grandchildren in the manner they specify. Given that this was a long term marriage (of

more than 41 years) and that the only children they each have are children of their marriage, they

also wanted to provide maximum flexibility for the surviving settlor to be able to alter the

dispositive provisions of the Trust, even after the death of the first settlor, in order to keep up with

changing family circumstances and family dynamics. For this reason, the surviving settlor was

given a general power of appointment over the assets of the Survivor's Trust and the Marital Trust.

Furthermore, given the settlors' family and financial circumstances at the time the Trust was

created, as well as the gift and estate tax laws then in existence, the settlors were advised by their

estate planning attorney to create an A/B/C type trust to provide for the creation of a credit shelter

trust and marital trust at the death of the first spouse that would maximize the amount the settlors

could ultimately pass to their beneficiaries on the death of the second spouse. This type of A/B/C

trust was typical of the type of trust that was used, in or around 1991 for families with a net worth

similar to that of the settlors.

9. Change in Tax Laws Dictate Change in Estate Plan. There have been significant

changes in the gift and estate lax laws since 1991, the year in which the Trust was created by the

settlors. In 1991, the applicable exclusion amount (or the amount that each individual could give

away tax free at death) was $600,000. In 2016, the applicable exclusion amount is $5,450,000.

Furthermore, in 1991, the only way to capture a deceased spouse's personal exemption (and thereby

maximize the amount that can be given to the settlors' beneficiaries free of estate tax at the death of

the second settlor) was to include provisions in a trust for the creation of a credit shelter trust at the

death of the first settlor to hold an amount equal to the deceased spouse's exemption amount (i.e.,

$600,000) which is exactly what the Family Trust provides. In

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order to take advantage of this type of planning, however, the tax laws require that the credit shelter

trust must be established as an irrevocable trust. However, in 2012, the concept of "portability"

was introduced into the Internal Revenue Code. Portability allows a surviving spouse to elect, on

the deceased spouse's estate tax return (Form 706), to "port over" to the surviving spouse the

deceased spouse's unused exclusion amount. In other words, after 2012, the establishment of a

credit shelter trust was no longer the only way to take advantage of a deceased spouse's unused

exemption for tax planning purposes. Petitioner has been advised by her estate planning attorney

and her accountant, that given her present family and financial circumstances, there would be no

discernable tax advantage to creating and funding a credit shelter and/or marital trust, as the

provisions of the Trust currently dictate. Indeed, Petitioner has been advised that creating and

funding a credit shelter trust could create adverse income tax consequences for her beneficiaries

upon her death, with no correspondence estate tax benefit.

Therefore, due to the changes in the tax laws and the changes in the settlor's family and

financial circumstances since the initial creation of the Trust in 1991, the Surviving Settlor and the

other beneficiaries of the Trust desire to modify the terms of the Trust, as requested herein, in order

to fulfill the initial purpose and intent of the settlors in creating the Trust; namely, to create a plan

for the distribution of the Trust property at time of the Surviving Settlors death in a manner that

avoids probate, minimizes death taxes and adverse income tax consequences, and maximizes the

amount that can be passed along to the remainder beneficiaries of the Trust, and to provide

maximum flexibility for the Surviving Settlor to be able to alter dispositive provisions of the Trust

Trust in order to keep up with changing family circumstances and family dynamics.

10. Family Agreement Regarding Modification of the

Family Trust. Notwithstanding the provisions of the Trust requiring the division of the trust estate

into three separate shares and the irrevocability of the Trust following the death of the deceased

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settlor, California Probate Code Section 15404 provides that if the settlor and all beneficiaries of an

irrevocable trust consent, they may compel the modification or termination of the trust. To that end

the Surviving Settlor and Beneficiaries of the Trust exercised their rights, under Probate Code

Section 15404, and entered into an agreement to eliminate the requirement that the trustee divide

the trust estate into three separate shares and create and fund the Credit Trust and/or Marital Trust

and instead provide that the remaining trust estate shall be distributed entirely to the Survivor's

Trust. A true and correct copy of the fully executed Family Agreement Regarding Modification of

the Family Trust ("Agreement") is attached hereto as Exhibit 4.

11. Relief Requested. Although the provisions of Probate Code Section 15404 do not

require court approval to modify or terminate a trust where, as here, the senior and all beneficiaries

of the trust consent to the modification, Petitioner seeks court confirmation of the Agreement or, in

the alternative, an order, pursuant to California Probate Code section 17200(b)(13), approving

modification of the Trust as set forth in paragraph 12 herein. The written consent to the Petition by

the two other beneficiaries of the Trust, Angela and Melissa, will be filed prior to the hearing on

this Petition.

12. Request for Confirmation of Agreement or, Alternatively, For Order Approving

Modification. Pursuant to the terms of the Agreement, the Surviving Settlor and the Beneficiaries

agreed to modify the Trust, as set forth below, and Petitioner seeks court confirmation of the

Agreement or, in the alternative, an order, pursuant to California Probate Code section 7200(b)(13),

approving modification of the Trust accordingly:

"1. Revocation of Section A of Article IV. Section A of Article IV of the Trust is

hereby revoked in its entirety and shall not be replaced.

2. Replacement of Section B of Article V. Section B of Article V of the Trust is

hereby revoked in its entirety and replaced with a new Section B, as follows:

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"B. Power of Revocation and Amendment After Death of Deceased Settlor. After the

death of the deceased settlor, the surviving settlor may at any time amend, revoke, or

terminate, in whole or in part, any trust created by this instrument, including, without

limitation, the Survivor's Trust. Any amendment, revocation, or termination of any trust

created by this instrument shall be made by written instrument signed by the surviving

settlor and delivered to the trustee. The written instrument for revocation or termination

must specify that a revocation or termination of trust is intended and specify the property

that is affected; a change in title or possession is not sufficient for revocation or

termination. After the death of the surviving settlor, none of the trusts created by this

instrument may be amended, revoked, or terminated."

3. Replacement of Article V. Article V of the Trust is hereby revoked in its entirety

and replaced with a new Article V, as follows:

"ARTICLE V

DISTRIBUTIONS AFTER DECEASED SETTLOR'S DEATH

A. Payment of Death Taxes, Debts, and Expenses on Statement From Personal

Representative. After the deceased settlor's death, on receipt by the trustee of a written

statement from the personal representative of the deceased settlor's estate requesting that the

trustee pay death taxes, debts, and expenses, with respect to any property in the deceased

settlor's estate, the trustee shall pay, either directly or to the personal representative, any

amounts requested by the personal representative for those purposes, in the manner

specified below. The trustee may rely on the personal representative's statement and shall

not be liable for any act or omission by the personal representative in protesting or failing to

protest the legality, propriety, or amount of the death taxes, debts, or expenses. If there is

no personal representative, the trustee shall make the payments directly. Payments of debts

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and expenses shall be made by the trustee from the trust estate. All death taxes payable by

reason of the death of the deceased settlor shall also be paid by the trustee from the trust

estate. The trustee shall not pay death taxes, debts, and expenses or other obligations of the

deceased settlor or the deceased settlor's estate from proceeds of insurance policies on the

deceased settlor's life if making those payments would be the sole cause of the proceeds

being includable in the deceased settlor's gross estate for federal estate tax purposes.

B. Trustee's Power to Defer Division or Distribution. Whenever the trustee is directed to

divide any part of the trust estate or distribute trust assets on the death of either settlor, the

trustee may, in the trustee's discretion, defer actual division or distribution for such

reasonable period of time as is needed to effectively identify, take possession of, value,

divide, and distribute the assets of the trust. During this time of deferral, the trustee may

manage the trust assets through a single administrative trust. The ability of the trustee to

delay division or distribution shall not affect the vesting of interests, which shall be as of

the date of death.

C. Disposition of Trust Estate After Death of Deceased Settlor. On the deceased settlor's

death, the trustee shall allocate to the Survivor's Trust the entire trust estate, consisting of

the surviving settlor's one-half (1/2) interest in the settlors' community property, the

surviving settlor's one-half (1/2) interest in the deceased settlor's quasi-community property,

and all of the surviving settlor's separate property and quasi-community property; and (ii)

the portion of the trust estate consisting of the deceased settlor's one-half (1/2) interest in

the settlors' community property, the deceased settlor's one-half (1/2) interest in the

deceased settlor's quasi-community property; and (iii) including any additions made to the

trust estate by reason of the deceased settlor's death, such as from the deceased settlor's

estate or policies of life insurance on his or her life. The Survivor's Trust assets shall be

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held, administered, and distributed by the trustee according to the terms of the Survivor's

Trust as set forth in Article Six. Notwithstanding the foregoing, it shall not be necessary to

rename the Trust or retitle trust assets that are to be allocated to and held in the Survivor's

Trust; rather, all trust assets that continue to be held in the name of the

FAMILY TRUST, shall be considered to be assets of the

Survivor's Trust.

D. Intention That Disposition Be Eligible for Marital Deduction. The settlors intend that

the disposition of the trust estate set forth in the preceding section (to the extent that it

provides for disposition of the deceased settlor's property to the Survivor's Trust) be

eligible for the federal estate tax marital deduction, and this instrument shall be construed

accordingly."

4. Revocation of Sections C, D, E and F of Article VI. Sections C, D, E and F of Article

VI of the Trust are hereby revoked in their entirety and shall not be replaced.

5. Replacement of Section B.2 of Article VI. Section B.2 of Article VI of the Trust is

hereby revoked in its entirety and replaced with a new Section B.2, as follows:

"2. Distribution of Remainder. On the death of the surviving settlor, the trustee shall

distribute all the property subject to the trust (including all income then accrued but

uncollected and all net income then remaining in the hands of the trustee) as follows:

a. General Power of Appointment. On the death of the surviving settlor, all of the trust property (including the trust principal, all net income then held by the trustee, and all income then accrued but not collected by the trustee) shall be paid over and delivered to any entity or entities, person or persons, and on any trust, terms, and conditions, or to or in favor of the estate of the surviving settlor, as the surviving settlor, may direct by will, trust, or other written instrument, provided only that no exercise of this power of appointment shall be effective unless it refers to this instrument and expressly indicates an intention to exercise this power of appointment. The trustee may rely on any will (whether or not admitted to probate), trust or other written instrument that on its face appears to be a valid exercise of the surviving spouse's power of appointment and shall not be liable for any good-faith act in reliance on that will or written instrument, even if for any reason it is later

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determined to be invalid with respect to its purported exercise of this power of appointment. If the trustee receives no notice within six (6) months after the surviving spouse's death of the existence of a will or other written instrument by the surviving spouse purporting to exercise the power of appointment, the trustee may distribute the trust property as though this power of appointment had not been exercised and shall in that event be conclusively presumed to have acted in good faith, even if a valid will or other written instrument is thereafter discovered.

b. Payment of Taxes, Debts and Expenses. On the death of the surviving settlor and subject to any power of appointment exercised by her, the trustee, in the trustee's discretion, may pay out of the income or principal (or partly from each) of the Survivor's Trust the taxes, debts and expenses arising on the death of the surviving settlor unless the trustee determines that other adequate provisions have been made for the payment of these taxes, debts and expenses.

c. Default Provision. If any of the property subject to the power of appointment of the surviving settlor is not effectively appointed by her, that property, after payment of any taxes, debts, and expenses pursuant to the applicable provisions of this instrument, shall be distributed in the manner specified in Section F of Article VI applicable to the remainder provisions of the Survivor's Trust."

6. Amendment of Section F of Article VI. Section F of Article VI of the Trust is hereby amended, as follows.

(i) The heading of this section F is hereby changed to read as follows:

"F. Distribution of Survivor's Trust Upon Death of Surviving Settlor."

(ii) All references in this section F to the "Credit Trust" and the "Marital Trust" shall be ignored as those subtrusts have not been and will not be created. The provisions of section F of Article VI shall apply only to the Survivor's Trust."

13. Legal Basis for Modification of the Trust. Petitioner seeks court confirmation of the

Agreement (attached hereto as Exhibit 4) or, in the alternative, an order approving modification of

the Trust as set forth in paragraph 12 herein. The legal bases for Petitioner's are as follows:

A. Modification Based on Consent of the Settlor and All Trust Beneficiaries.

California Probate Code Section 15404 provides that if the settlor and all beneficiaries of an

irrevocable trust consent, they may compel the modification or termination of the trust. Through

the enactment of California Probate Code Section 15404, the California Law Revision Commission

makes the following point: "[u]nder existing law, if the settlor and all beneficiaries are legally

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competent and seek the termination or modification of an otherwise irrevocable trust, it can be

terminated or modified even though the purposes of the trust have not been accomplished and

notwithstanding a spendthrift provision in the trust. This rule stands on the firm footing that if

everyone with an interest agrees to a modification or termination, there is no reason not to allow

it....[I]f consent can be obtained through appropriate means, there is no public policy that requires

continuation of the trust. The proposed law codifies this rule." (18 Cal. Law Rev. Com. Reports, p.

568.)"

Furthermore, California Probate Code § 17200(a) allows a trustee or beneficiary to

"petition the court. . . concerning the internal affairs of the trust..." Subdivision (b) sets forth a

non-exclusive list of examples of proceedings which "concern the internal affairs of the trust"

within the meaning of section 17200(a), including, "[approving or directing the modification . . .

of the trust." Probate Code § 17200 (b)(13).

Additionally, the broader equitable power of courts to modify or reform a trust is preserved

by operation of California Probate Code § 15002, which provides that "[e]xcept to the extent that

the common law rules governing trusts are modified by statute, the common law as to trusts is the

law of this state." Probate Code § 15002; Ike v. Doolittle (1998) 61 Cal.App.4th 51, 84, 70

Cal.Rptr.2d 887. The Restatement (Third) of Trusts (Trusts 3rd) has promulgated policy on the

Modification and Termination of Trusts in Part 5, Chapter 13. According to Professor Edward C.

Halbach, Jr., the policy is to favor increased flexibility in modifications and terminations of trusts,

calling that flexibility "vital," and calling for greater flexibility in pursuit of beneficiaries' best

interest which are also likely to further the objectives of the trust creators. Consistent with this

policy favoring increased flexibility in enacting modifications to irrevocable trusts, Petitioner

requests that the requested modifications should be approved and ordered because they are in the

best interest of the beneficiaries, as signified by their consents.

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///

As discussed herein above, the Surviving Settlor and Beneficiaries of the Trust exercised

their rights, under Probate Code Section 15404, and entered into a Family Agreement Regarding

Modification of the Family Trust (attached hereto as Exhibit 4) to

eliminate the requirement that the trustee divide the trust estate into three separate shares and create

and fund the Credit Trust and/or Marital Trust and instead provide that the remaining trust estate

shall be distributed entirely to the Survivor's Trust.

Pursuant to the authorities cited above, Petitioner seeks court confirmation of the

Agreement (attached hereto as Exhibit 4) or, in the alternative, an order approving modification of

the Trust as set forth in paragraph 12 herein.

B. Modification Based on Changed Circumstances. Probate Code section 15409,

subdivision (a) provides grounds for modification based on changed circumstances: "[o]n petition

by a trustee or beneficiary, the court may modify the administrative or dispositive provision of the

trust or terminate the trust if, owing to circumstances not known to the settlor and not anticipated

by the settlor, the continuation of the trust under its terms would defeat or substantially impair the

accomplishment of the purposes of the trust...."

As discussed above, the initial purposes and intent of the settlors in creating the Trust was

to: (i) create a plan for the distribution of the Trust property at time of the Surviving Settlor's death

in a manner that avoids probate, minimizes death taxes and adverse income tax consequences, and

maximizes the amount that can be passed along to the remainder beneficiaries of the Trust; and (ii)

provide maximum flexibility for the Surviving Settlor to be able to alter the dispositive provisions

of the Trust in order to keep up with changing family circumstances and family dynamics. Given

the settlors' estate planning goals and objectives, their family and financial circumstances at the

time the Trust was created, as well as the gift and estate tax laws then in existence, the settlors were

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advised by their estate planning attorney to create an A/B type trust to provide for the creation of a

credit shelter trust at the death of the first spouse that would maximize the amount the settlors could

ultimately pass to their beneficiaries on the death of the second spouse. This type of A/B trust was

typical of the type of trust that was used, in or around 1991 for families with a net worth similar to

that of the settlors.

However, there have been significant changes in the gift and estate lax laws since 1991, the

year in which the Trust was created by the settlors. In 1991, the applicable exclusion amount (or

the amount that each individual could give away tax free at death) was $600,000. In 2016, the

applicable exclusion amount is $5,450,000. Furthermore, in 1991, the only way to capture a

deceased spouse's exemption (and thereby maximize the amount that can be given to the settlors'

beneficiaries free of estate tax at the death of the second settlor) was to include provisions in a trust

for the creation of a credit shelter trust at the death of the first settlor to hold an amount equal to the

deceased spouse's exemption amount (i.e., $600,000) which is exactly what the

Family Trust provides. In order to take advantage of this type of planning,

however, the tax laws require that the credit shelter trust must be established as an irrevocable trust.

However, in 2012, the concept of "portability" was introduced into the Internal Revenue Code.

Portability allows a surviving spouse to elect, on the deceased spouse's estate tax return (Form 706),

to "port over" to the surviving spouse the deceased spouse's unused exclusion amount. In other

words, in 2016, the establishment of a credit shelter trust is no longer the only way to take

advantage of a deceased spouse's unused exemption for tax planning purposes. Indeed, Petitioner

has been advised by her estate planning attorney and her accountant, that given her present family

and financial circumstances, there would be no discernable tax advantage to creating and funding a

credit shelter and/or marital trust, as the provisions of the Trust currently dictate. Indeed, Petitioner

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has been advised that creating and funding a credit shelter trust could create adverse income tax

consequences for her beneficiaries upon her death, with no correspondence estate tax benefit.

Therefore, due to the substantial changes in the tax laws and the changes in the settlor's

family and financial circumstances since the initial creation of the Trust in 1991, the continuation of

the trust under its present terms would defeat or substantially impair the accomplishment of two of

the main purposes of the trust: (i) to create a plan for the distribution of the Trust property at time of

the Surviving Settlors death in a manner that minimizes adverse income tax consequences to the

remainder beneficiaries; and (ii) to provide maximum flexibility for the Surviving Settlor to be able

to alter the dispositive provisions of the Trust in order to keep up with changing family

circumstances and family dynamics. It would not have been possible for the settlors or their

attorney and other professional advisors at that time to foresee the unprecedented changes to the

estate tax laws that occurred, commencing in 2001, with the enactment of the Economic Growth

Tax Relief and Reconciliation Act of 2001, which significantly increased the applicable exclusion

amount over a ten year period from $675,000 to $3.5 million per person, and culminated with the

American Taxpayer Relief Act of 2012, which, in addition to permanently raising the applicable

exclusion amount to $5,000,000 (indexed for inflation), also introduced the concept of "portability,"

as discussed in more detail in paragraph 9 herein above, all of which now obviates the need to

establish a credit shelter trust as required under the current terms of the Trust.

Based on the facts and authorities cited above, Petitioner submits that modification of the

Trust as requested herein is warranted, and requests that if, for any reason, the Court is unwilling to

confirm the Agreement (attached hereto as Exhibit 4) or, in the alternative, issue an order

approving modification of the Trust pursuant to Probate Code Sections 15403 and 17200 (b)(13) as

requested herein, that the Court approve the Petition based on changed circumstances pursuant to

Probate Code Section 15409.

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14. Notice. All parties entitled to notice of this petition pursuant to Probate Code §

17201 are as follows:

, Petitioner and Settlor

, Beneficiary

, Beneficiary

, Child of Settlors c/o , Conservator ISM 15. No Requests for Special Notice. There are no requests for special notice on file

herein.

WHEREFORE, Petitioner prays:

1. For an order of the Court confirming the Family Agreement Regarding Modification

of the Family Trust (attached hereto as Exhibit 4) or, in the

alternative, issue an order approving modification of the Trust pursuant to Probate Code Sections

15403 and 17200 (b)(13) as requested in paragraph 12 herein; and

2. In the alternative, for an order of the Court approving the Petition based on changed

circumstances pursuant to Probate Code Section 15409; and

3. For such other and further relief as the Court deems just and proper.


Dated: May ,2016 By: Paul D. Velasco, Esq., Attorney for Petitioner

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VERIFICATION

I, , declare as follows:

I am the Petitioner in the above-entitled matter and have read the foregoing PETITION

FOR ORDER CONFIRMING FAMILY AGREEMENT RE: MODIFICATION OF TRUST, and

know the contents thereof. The same is true of my own knowledge, except as to those matters that

are therein alleged on information and belief, and as to those matters, I believe them to be true.

I declare under penalty of perjury under the laws of the State of California that the

foregoing is true and correct.

Dated this day of May 2016, at Los Angeles, California.

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APPENDIX 10

SAMPLE PROVISIONS FOR DISCLAIMER TRUST — LIMITATION ON POWER OF SURVIVOR TO REVOKE OR AMEND GIFTS OF DECEASED SETTLOR

OPTION 1 [GIFTS MADE BY ONE SETTLOR]:

3.2. Power of Revocation and Amendment After Death of Deceased Settlor. After the

death of the deceased settlor, the surviving settlor may at any time amend, revoke, or terminate,

in whole or in part, any trust created by this instrument other than the Disclaimer Trust, which

shall be irrevocable and not subject to amendment. Notwithstanding the foregoing, or any other

provision of this trust instrument, if [GIFTING SPOUSE] is the surviving settlor, [he] [she] may

not amend or revoke the gift made by the deceased settlor, as set forth in Section 5.1, which shall

become irrevocable on the death of the deceased settlor. After the death of the surviving settlor,

none of the trusts created by this instrument may be amended, revoked, or terminated.

OPTION 2 [GIFTS MADE BY BOTH SETTLORS]:

3.2. Power of Revocation and Amendment After Death of Deceased Settlor. After the

death of the deceased settlor, the surviving settlor may at any time amend, revoke, or terminate,

in whole or in part, any trust created by this instrument other than the Disclaimer Trust, which

shall be irrevocable and not subject to amendment. However, the surviving settlor may not

amend or revoke the gifts of the deceased settlor set forth in Sections 5.1 or 5.2, 5.3 as the case

may be, which shall become irrevocable on the death of the deceased settlor. After the death of

the surviving settlor, none of the trusts created by this instrument may be amended, revoked, or

terminated.

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SAMPLE: GIFTS MADE BY DECEASED SETTLOR AT FIRST DEATH

5.1. Distributions if Marc J. Smith is Deceased Settlor. If MARC J. SMITH is

the deceased settlor, then on the death of the deceased settlor, the trustee shall make the

following distributions:

(a) As soon as is practicable following the death of the deceased settlor, the trustee shall distribute the sum of two hundred fifty thousand dollars ($250,000) outright to LISA B. JONES, if she survives the deceased settlor, and if she does not survive the deceased settlor, then to ADRIAN M. JONES, if he survives the deceased settlor. If LISA B. JONES and ADRIAN M. JONES fail to survive the deceased settlor, this gift shall lapse and the property shall be held, administered and distributed according to the terms set forth in 5.6 of this trust instrument.

(c) This gift may be satisfied only out of the deceased settlor's separate property and/or the deceased settlor's community property interests.

5.2. Distributions if Olivia Grigorjeva is Deceased Settlor. If OLIVIA SMITH is the

deceased settlor, then on the death of the deceased settlor, the trustee shall make the following

distributions:

(a) As soon as is practicable following the death of the deceased settlor, the trustee shall distribute the sum of five hundred thousand dollars ($500,000) outright to IRENE McDONALD, if she survives the deceased settlor, and if she does not survive the deceased settlor, then to BRETT McDONALD, if he survives the deceased settlor, this gift shall lapse and the property shall be held, administered and distributed according to the terms set forth in 5.6 of this trust instrument. This gift may be satisfied only out of the deceased settlor's separate property.

(b) All of the settlors' interest in the real property commonly known as 1225 N. Detroit, #5, Los Angeles, California (APN: ****-***-***), together with any insurance on such property, shall be distributed outright to IRENE McDONALD, if she survives the deceased settlor. This property shall pass subject to any liens and encumbrances, without exoneration. If IRENE McDONALD fails to survive the deceased settlor, this property shall be distributed outright to BRETT McDONALD, if he survives the deceased settlor. If IRENE McDONALD and BRETT McDONALD fail to survive the deceased settlor, this property shall be held, administered and distributed according to the terms set forth in 5.6 of this trust instrument. If this property is not in the trust or estate of the settlor on the date of the deceased settlor's death, this gift shall lapse.

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(c) These gifts may be satisfied only out of the deceased settlor's separate property and/or the deceased settlor's community property interests.

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APPENDIX 11

GIFT OF REAL PROPERTY

5.1 Special Gift of Real Property on Death of Surviving Settlor. All of the settlor's interest in the real property commonly known as [Address], [City], California (APN: ****-***-***) (the "Property") shall be distributed outright to JOHN H. SMITH ("JOHN"), if he survives the settlor. If JOHN fails to survive the settlor, this Property shall be distributed with the remainder of the trust estate as if it had been an original part thereof. The following terms and conditions shall apply to the gift of his Property.

(a) Replacement Property. [OPTION 1: If this Property has been sold by the trustee, and the proceeds reinvested in another property, such replacement property (subject to any liens and encumbrances, without exoneration) shall be distributed as stated above. If this Property (or replacement property) is not in the trust or estate of the settlor on the date of the settlor's death, this gift shall lapse.] OR [OPTION 2: If this Property is not in the trust or estate of the settlor on the date of the settlor's death, this gift shall lapse.]

(b) Distribution of Proceeds from Sale of Property. If this Property (or replacement property) has been sold during the lifetime of the settlor and not reinvested in another property, the trustee shall distribute the net proceeds of sale remaining in the trust estate at the death of the settlor outright to JOHN, if he survives the settlor. If JOHN fails to survive the settlor, this gift shall lapse and such proceeds shall be distributed with the remainder of the trust estate as if it had been an original part thereof. In order to carry out the settlor's intent to distribute the remaining net proceeds of sale from the Property to JOHN, if any person or entity other than the settlor is acting as trustee, the trustee shall maintain the proceeds of sale in a separate or segregated account or accounts and shall refrain from commingling such funds with other trust property. Furthermore, if any person or entity other than the settlor is acting as trustee, the trustee shall make best efforts to preserve such funds for ultimate distribution in accordance with the provisions of this subsection by using other trust property and resources for the health, support and maintenance of the settlor during the settlor's lifetime to the extent that such other trust property and resources are available for use for such purposes. The foregoing shall not be interpreted in any way as to limit the trustee's duty and power to use the proceeds for the benefit of the settlor during the lifetime of the settlor pursuant to the other provisions of this trust instrument if there is no other trust property or resources available for use for such purposes. The needs and desires of the settlor shall take priority over the needs or entitlement of any other future or contingent beneficiary of this trust.

(c) Gift Shall Be Subject to Estate Taxes OR Gift Shall be Free of Estates Taxes. [OPTION 1: Notwithstanding any other provision of this trust instrument, property distributed under this subparagraph (**) shall be subject to

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apportionment and/or payment of any estate, inheritance or other death taxes.] OR [OPTION 2: Notwithstanding any other provision of this trust instrument, property distributed under this subparagraph (**) shall not be subject to apportionment and/or payment of any estate, inheritance or other death taxes.]

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APPENDIX 12

AGREEMENT TO TRANSFER REAL PROPERTY

This AGREEMENT (the "Agreement"), consisting of two (2) pages, including signatures, is entered into as of this 13th day of April, 2018, by and between REBECCA G. SMITH ("REBECCA") and JUANITA GARCIA ("JUANITA") (sometimes referred to collectively herein as the "parties"), with reference to the following facts:

RECITALS

On the date that REBECCA is executing this Agreement, she is also executing the REBECCA G. SMITH LIVING TRUST ("Trust"), which provides for the distribution of her entire estate upon her death. REBECCA currently owns the real property commonly known as 5590 East 35th Street, Maywood, California (APN: 0000-000-000) (the "Maywood Property) and it is her testamentary desire that the Maywood Property be distributed to her granddaughter, ALYSSA GARCIA ("ALYSSA") at the time of her death. However, REBECCA has been advised by her estate planning attorney that there would be adverse tax consequences to her ALYSSA if she leaves the property directly to her at the time of her death. Therefore, REBECCA has made the decision to provide, in the Trust, for the distribution of the Maywood Property to her daughter, JUANITA, at the time of her death, but with the understanding that after the property has been distributed to JUANITA from the Trust, JUANITA will immediately transfer and distribute the Maywood Property outright to ALYSSA, in accordance with REBECCA's testamentary wishes. The parties hereto now desire to enter into this Agreement to memorialize their agreement and understanding.

AGREEMENT

NOW, THEREFORE, in consideration of the mutual covenants, conditions and agreements contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by all parties, the parties hereto mutually agree as follows:

1. JUANITA agrees that, if the Maywood Property is distributed to her upon REBECCA's death, in accordance with the terms of the Trust, she will then, immediately, transfer and distribute such property outright to ALYSSA, if she is then living, by executing and recording, in the Los Angeles County Recorder's Office, a grant deed or quitclaim deed for that purpose. If ALYSSA is not then living, then JUANITA may keep the Maywood Property.

2. REBECCA hereby states, and JUANITA acknowledges, that but for this Agreement between REBECCA and JUANITA, REBECCA would not have provided, in her Trust, for the distribution of the Maywood Property to JUANITA at the time of her death, and would have instead provided for the distribution of such property outright to ALYSSA. In making the provision, in her Trust, for the distribution of the Maywood Property to JUANITA upon REBECCA's death, REBECCA is relying on JUANITA's promise, covenant and agreement, as set forth herein, to carry out REBECCA's testamentary wish that ALYSSA receive such property at the time of REBECCA's death.

3. The parties acknowledge and understand that REBECCA' s Trust is revocable and that she may amend or revoke her Trust, in any manner, in whole or in part, and at any time,

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including, without limitation, the power to modify, amend or revoke the provisions for the disposition of the Maywood Property at the time of her death. Therefore, the parties agree that, notwithstanding this Agreement or any of its provisions, REBECCA is under no obligation to provide in her will or Trust for the distribution of the Maywood Property to JUANITA, or ALYSSA, or any other person or persons, and that she may modify, revise or revoke those provisions, at any time, and without the prior knowledge or consent of JUANITA and/or ALYSSA.

4. This Agreement embodies the entire agreement of the parties hereto and supersedes any and all other agreements, understandings, negotiations, or discussions, either oral or in writing, expressed or implied, between the parties to this Agreement. The parties to this Agreement each acknowledge that no representations, inducements, promises, agreements or warranties, oral or otherwise, have been made by them, or anyone acting on their behalf, which are not embodied in this Agreement; that they have not executed this Agreement in reliance on any representation, inducement, promise, agreement, warranty, fact or circumstance not expressly set forth in this Agreement; and that no representation, inducement, promise, agreement or warranty not contained in this Agreement, including but not limited to any purported supplement, modification, waiver or termination of this Agreement, shall be valid or binding, unless executed in writing by the party against whom it is sought to be enforced. This Agreement may not be amended, nor may any provision herein be waived, except in writing signed by the party against whom such amendment or waiver is sought to be enforced.

5. This Agreement shall inure to the benefit of, and shall be binding upon, the parties and their respective heirs, legal representatives, successors and permitted assigns; provided, however, this Agreement shall not be assigned by either party without the express prior written consent of the other party.

6. This Agreement shall be interpreted under the laws of the State of California, both as to interpretation and performance.

REBECCA G. SMITH

JUANITA GARCIA

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APPENDIX 13a

Right to Purchase Real Property

5.1. Right to Purchase Real Property. On the settlor's death, JOHN GARCIA

("purchasing party") shall have the right to purchase the real property located at 5500 Main

Street, Montclair, California (APN: 0000-000-00-0-000) ("Property"). The following terms and

conditions shall apply to the right to purchase granted herein:

(a) Exercise of Right to Purchase. The purchasing party must exercise his right to purchase the Property by notifying the trustee of his intent, in writing, within ninety (90) days following the mailing to the qualifying party of a Notification by Trustee pursuant to California Probate Code Section 16061.7 et seq., with a copy of the Trust instrument.

(b) Purchase Price. For purposes of determining the Purchase Price (as defined herein below), the trustee shall, in the Trustee's sole and absolute discretion, select an independent and impartial licensed appraiser to issue a formal appraisal of the Property, with the date of appraisal to be within 30 days of the trustee's receipt of the notification of intent to purchase the Property. The cost of the appraisal shall be paid from the trust estate. The appraisal shall not apply a discount for lack of marketability, control or other reason based on the fact that the purchasing party is purchasing fractional ownership interests of the other remainder beneficiaries. The purchase price shall be 95% of the appraised value of the Property ("Purchase Price") as determined by the appraiser. The appraisal shall be mail served by the trustee on the purchasing party. The purchasing party will have fifteen (15) days from the date of service of the appraisal (without an extension of time for mailing) to confirm, in writing, his or her agreement to purchase the property for the Purchase Price. The purchasing party may apply the amount of his distributive share of the trust estate to reduce the out of pocket amount actually paid by the purchasing party to satisfy the Purchase Price. The purchasing party may obtain a loan, if he desires, to complete the purchase of the Property. If the purchasing party does not give written notice to the trustee, within the 15-day time period specified above, of his agreement to purchase the Property for the Purchase Price, the purchasing party's right to purchase the Property shall expire.

(c) Time Period for Completion of Sale and Close of Escrow. If the purchasing party exercises his right to purchase the Property on the terms and conditions stated herein, the sale must be completed and escrow must close within ninety (90) days following the purchasing party's written notification to the trustee of the purchasing party's agreement to purchase the property for the Purchase Price. If escrow does not close within said 90-day period, the purchasing party's right to

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purchase the Property shall expire. Notwithstanding the foregoing, if escrow does not close within the 90-day period designated above and the reason or reasons for such failure are not attributable to delays caused by, or otherwise the fault of, the purchasing party, the trustee shall extend the 90-day for a reasonable time under the circumstances. All escrow costs and other costs of sale shall be shared equally between the trust estate and the purchasing party.

(d) Expiration of Right to Purchase. If the purchasing party fails to comply with the various stated time periods stated herein, that individual's right to purchase the Property shall expire. Upon the expiration of the purchasing party's right to purchase the Property, the Property shall be distributed in accordance with the other provisions of this trust instrument.

(e) Settlor's Intent for Right to Purchase to Preserve Parent to Child Property Tax Reassessment Exclusions. Pursuant to Cal. BOE Annotations 625.0233, the settlor intends the Right to Purchase the Property herein to qualify for the exclusion from reassessment of the Property for transfers between parent and child (Proposition 58).

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STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION PROPERTY AND SPECIAL TAXES DEPARTMENT 450 N STREET, SACRAMENTO, CALIFORNIA PO BOX 942879, SACRAMENTO, CALIFORNIA 94279-0064 916 445-4982 FAX 916 323-8765 www.boe.ca.gov

BETTY T. YEE First District, San Francisco

BILL LEONARD Second District, Ontario/Sacramento

MICHELLE STEEL Third District, Rolling Hills Estates

JUDY CHU, Ph.D. Fourth District, Los Angeles

February 29, 2008 JOHN CHIANG State Controller

RAMON J. HIRSIG Executive Director

No. 2008/018

TO COUNTY ASSESSORS:

REVENUE AND TAXATION CODE SECTION 63.1: PARENT-CHILD AND GRANDPARENT-GRANDCHILD EXCLUSION

QUESTIONS AND ANSWERS

Since Proposition 58 (in 1986) and Proposition 193 (in 1996) were adopted, the Board of Equalization (Board) has issued several Letters To Assessors containing questions and answers regarding these two propositions (LTAs No. 87/72, dated September 11, 1987; No. 88/10, dated February 11, 1988; and No. 98/23, dated April 22, 1998). This letter supersedes these previous letters as changes in the law have occurred since the issuance of those letters.

HISTORY. On November 4, 1986, the voters of California adopted Proposition 58, which added subdivision (h) to section 2 of article XIII A of the California Constitution to provide that "purchase" and "change in ownership" do not include the purchase or transfer of (1) principal residences between parents and children, and (2) the first $1 million of the full cash value of all other real property (other than principal residences) between parents and children. Section 63.1 was added to the Revenue and Taxation Code' to implement the parent-child exclusion provisions of Proposition 58 and applies to any purchases or transfers between parents and children that occur on or after November 6, 1986.

On March 26, 1996, the voters of California adopted Proposition 193, which further amended section 2, subdivision (h) of article XIII A to exclude from the definition of change in ownership certain transfers from grandparents to their grandchildren. Section 63.1 was amended to reflect the grandparent-grandchild provisions.

DEFINITIONS

Section 63.1 provides various definitions, which are described briefly as follows:

I. Principal residence — a dwelling for which a transferor was eligible for either the homeowners' exemption or a disabled veterans' exemption as a result of the transferor's ownership and occupation of the residence. A principal residence includes only that portion of the land that consists of an area of reasonable size that is used as a site for the residence.

I All statutory references are to the Revenue and Taxation Code unless otherwise indicated.

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TO COUNTY ASSESSORS 2 February 29, 2008

2. Purchase or transfer between parents and their children — any transfer of real property between a parent and a child (either way) or from a grandparent to a grandchild (one way).

3. Children—

• A child born of the parent(s). • A stepchild or spouse of that stepchild while the relationship of stepparent and

stepchild exists. • A son-in-law or daughter-in-law of the parent(s). • A statutorily adopted child, who was adopted by the age of 18. • A foster child of a state-licensed foster parent.2

4. Grandchildren— any children of a child of the grandparent.

5. Full Cash Value — as defined by section 110.1 and subdivision (a) of section 2 of article XIII A of the California Constitution just prior to the date of transfer. Section 110.1 provides that "full cash value" means the fair market value as of the 1975 lien date or the date of change in ownership, whichever occurs last, plus inflationary factoring. In other words, it is the adjusted base year value just prior to the date of transfer. Where the transferred property is restricted by a Williamson Land Conservation Act or Mills Act historical property contract or is located in a Timberland Production Zone, the excluded value is the adjusted base year value, not the restricted value.

6. Eligible Transferor — grandparent, parent or child of an eligible transferee.

7. Eligible Transferee— parent, child or grandchild of an eligible transferor.

8. Real Property — land and improvements as defined in section 104; it does not include any interest in a legal entity.

FILING PERIODS. In order to grant either exclusion, the county assessor must receive a claim. Claim forms are available from the county assessor. An exclusion may be granted as of the date of transfer if the claim form is received prior to the following dates:

• Within three years of the date of transfer or before a transfer to a third party. • If a notice of supplemental or escape assessment is mailed after either of the above deadlines,

within six months of the date of notice. • If the notice of supplemental or escape assessment is mailed before the end of the three-year

period, the transferee still has until the end of the three-year period to file a timely claim.

If all deadlines have expired and the transferee still owns the property, the transferee may file a claim and receive prospective relief only. Prospective relief applies to the lien date of the assessment year in which the claim is filed. The assessment year is the period between lien dates

2 See Letter To Assessors 2007/048 for further details.

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(that is, a calendar year). For example, prospective relief for a claim filed in 2006 will be applied as of the January 1, 2006 lien date for the 2006-07 fiscal year.

Si MILLION LIMIT. These exclusions are limited to the first $1 million of the full cash value of all real property, other than the principal residence, transferred between an eligible transferor and an eligible transferee. Our opinion is that the $1 million exclusion applies only to the first $1 million of the full cash value of "other real property" for which a claim has been filed and the exclusion granted. Section 63.1 provides, in pertinent part:

(a) Notwithstanding any other provision of this chapter, a change in ownership shall not include the following purchases or transfers for which a claim is filed pursuant to this section...

(2) The purchase or transfer of the first one million dollars ($1,000,000) of full cash value of all other real property of an eligible transferor in the case of a purchase or transfer between parents and their children.3

The first sentence of subdivision (a) states that change in ownership shall not include transfers for which a parent-child claim is filed. Paragraph (2) of subdivision (a) defines one of the types of transfers to which section 63.1 applies. When read together, the plain meaning of subdivision (a)(2) is that change in ownership shall not include transfers of the first $1 million dollars of full cash value of real property for which parent-child exclusion claims are filed. The clear inference is that when real property is transferred between a parent and child and a claim for exclusion is not filed, then such a transfer is a change in ownership and will not be counted or cumulated for purposes of the $1 million exclusion limitation.

However, if parent-child claims are filed for multiple properties of which the full cash values cumulatively exceed the $1 million limit, then the transfer date becomes the determining factor for which properties are to receive the property tax exclusion. In other words, the first properties transferred shall receive the $1 million exclusion in this situation. If the transfer date is the same for all properties (for example, date of death), the transferees must decide which properties are to receive the $1 million exclusion. The exclusion is to be applied on a pro rata basis and not to selected portions of the appraisal unit.4

Example I In addition to his principal residence, a father owns other real property which has an adjusted base year value of $2,000,000. In 1998, the father grants a portion of real property that has an adjusted base year value of $1,000,000 to son A. In 2000, the father grants another portion of real property that has an adjusted base year value of $1,000,000 to son B.

• If both sons file for the exclusion on the $2,000,000, only the $1,000,000 to son A will qualify because the father transferred this portion of real property to son A first.

3 Section 63.1(a)(3) makes this provision applicable, under certain circumstances, to transfers of real property from grandparents to grandchildren. 4 Section 63.1(d)(2).

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TO COUNTY ASSESSORS February 29, 2008

• However, if only son B files for the exclusion, his $1,000,000 will be excluded because son A did not claim the exclusion for the property he received.

Example 2 In addition to his principal residence, a father owns four parcels of other real property with a combined adjusted base year value of $2,000,000. The father dies in 1992. His will bequeaths two parcels to son A and the other two parcels to son B. Both sons file parent-child exclusion claims for the real property. Since the transfer date is the same for all the properties, sons A and B must decide which properties are to receive the $1 million exclusion. The exclusion is to be applied on a pro rata basis and not to selected portions.

Example 3 In addition to his principal residence, a father owns four parcels of other real property with a combined adjusted base year value of $2,000,000. In 2000, the father sells one parcel with an adjusted base year value of $500,000 to his daughter. She files a parent-child exclusion claim on this property. The father dies in 2004. His will bequeaths the remaining three parcels to his children. Since only $500,000 of the father's $1 million exclusion remains, the children must decide which of the three properties that transferred upon the father's death are to receive the remainder of the exclusion.

GRANDPARENT-GRANDCHILD EXCLUSIONS

Section 63.1, subdivision (a)(3)(A), allows certain transfers of real property from grandparents to their grandchildren to be excluded from reappraisal.

Effective Date. The date of transfer must occur on or after March 27, 1996.

Middle Generation Limitation. As of the date of transfer, the parents of the grandchild or grandchildren who qualify as the children of the grandparents, as defined in section 63.1(c)(3), must be deceased as of the date of transfer. Beginning January 1, 2006, a stepparent who is an in-law child of the grandparent does not need to be deceased in order for the grandchild to qualify.

$1 Million Limitation. The adjusted base year value of real property, other than a principal residence, that grandparents transfer to their grandchildren is applied toward the grandchild's deceased parent's $1 million exclusion.

Principal Residence Limitation. A transfer of a principal residence from a grandparent to a grandchild may be excluded as a principal residence only if the grandchild has not already received a principal residence from his or her parents. If the grandchild had already received a principal residence from a parent that was eligible to be excluded under section 63.1(a)(1), then the value of any principal residence received from a grandparent will be considered to be "other real property" subject to the $1 million limitation. This is true even if the grandchild did not file for the parent-child exclusion when the grandchild received the parent's principal residence. This is so because the parent's principal residence was still eligible for the exclusion because it was a

5 See Letter To Assessors No. 97/32.

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parent-child transfer. Thus, in situations where the child has received a principal residence from his or her parents, the adjusted base year value of the grandparent's residence has to be applied toward the deceased parent's $1 million exclusion.

Enclosed is a series of frequently asked questions and answers. I hope this information is helpful. If you have any questions, please contact our Assessment Services Unit at 916-445-4982.

Sincerely,

/s/ David J. Gau

David J. Gau Deputy Director Property and Special Taxes Department

DJG:grs Enclosure

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REVENUE AND TAXATION CODE SECTION 63.1 QUESTIONS AND ANSWERS

PARENT-CHILD EXCLUSION QUESTIONS AND ANSWERS

PRINCIPAL RESIDENCES

1. Question: What is a principal residence?

Answer: As of January 1,2008, a principal residence is defined in section 63.1(b)(1) as the residence for which the transferor is eligible for either the homeowners' exemption or the disabled veterans' exemption because of the transferor's ownership and occupation of the residence.6 Previously, this section required that either the homeowners' exemption or the disabled veterans' exemption be granted in the name of the transferor.

A principal residence is a person's true, fixed, and permanent home and principal establishment to which the owner, whenever absent, intends to return. If the homeowners' or disabled veterans' exemption was not granted in the name of the transferor, then proof that the real property was the principal residence of the transferor must be provided. Proof of residency may include vehicle registration, voter registration, bank accounts, or income tax records.

In addition, a principal residence includes only that portion of the land that consists of a reasonable size that is used as a site for the residence.

2. Question: How many principal residences can be transferred by an eligible transferor under Section 63.1?

Answer: There is no limit to the number or the value of principal residences. For example, a parent sells the large family house to one child and purchases a smaller home, which becomes the parent's principal residence. After a few years, this home is too large, and the parent sells this residence to another child. Subsequently, the parent buys a condominium, which becomes the parent's principal residence. As long as both children file timely claims, both transfers qualify for the principal residence portion of the parent-child exclusion. Even if the parent transferred both principal residences to the same child, both transfers would qualify for the principal residence portion of the parent-child exclusion.

3. Question: Must the principal residence of the transferor become the principal residence of the transferee after the transfer?

Answer: No. The residence need only be the principal residence of the transferor in order to qualify as a principal residence under section 63.1(b)(1).

4. Question: Can a principal residence consist of multiple parcels?

Answer: Multiple parcels can be considered the principal residence if the parcels are contiguous and the residence straddles the lot line, thereby making one appraisal unit.7 Other factors that may be considered include related miscellaneous structures (for example, a detached garage), minimum zoning requirements, physical terrain, access, actual use,

6 Letter To Assessors No. 2007/060. 7 Letter To Assessors No. 82/50, questions G23, S3, V3.

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continuous landscaping, and fencing. For example, three one-acre parcels could be considered a principal residence if the zoning for the area is a minimum of three acres. Under these facts, the three one-acre parcels would be considered an appraisal unit because one parcel could not be sold separately without the other two.

5. Question: A parent owns two contiguous parcels. A house, which is his principal residence, sits on one parcel. The other parcel is a vacant lot. Parent wants to transfer both properties to son. Will both properties qualify as a principal residence?

Answer: No. Only the parcel with the house that is eligible for the homeowners' exemption qualifies as a principal residence. However, the other parcel may be excluded as "other property" and counted towards the parent's $1 million exclusion.

6. Question: A parent owns an apartment complex and lives in one of the units as his principal residence. Parent wants to transfer this complex to his son. Does the entire complex qualify as a principal residence?

Answer: No. Only the unit occupied as the principal residence qualifies for the principal residence portion of the parent-child exclusion. The remainder of the apartment complex would qualify as "other property" and apply towards the parent's $1 million exclusion.

7. Question: A parent owns a home and acreage that is restricted by a Williamson Act contract. Parent wants to transfer this property to his son. Does the entire property qualify for the exclusion? What affect will this have on the restricted value calculation?

Answer: Yes, the property will qualify for the exclusion. The home that is occupied as the principal residence and the homesite will qualify for the principal residence portion of the parent-child exclusion. The remainder of the property qualifies as "other property" and apply towards the parent's $1 million exclusion. Where the transferred property is restricted by a Williamson Land Conservation Act or Mills Act contract or is located in a Timberland Production Zone, the excluded value is the adjusted base year value, not the restricted value.

When property is restricted by a Williamson Land Conservation Act (open space) or Mills Act contract or is located in a Timberland Production Zone, it is annually valued by a specified income approach method, which results in a restricted value. The restricted value is compared to the factored base year value and current market value, and the lowest of the three values is enrolled. The parent-child exclusion will affect the factored base year value for the annual value comparison process.

DEFINITION OF "CHILD"

8. Question: Does an "equitable adoption" make a child eligible for the parent-child exclusion? Answer: No. Section 63.1(c)(3)(D) requires that a child be adopted pursuant to statute prior to the age of 18. A "statutory adoption" means an adoption in accordance with the adoption procedures contained in the Family Code. Pursuant to Probate Code section 6454, the criteria required for the establishment of a parent-child relationship for purposes of intestate

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succession (i.e., an "equitable adoption") is not considered a formal adoption for purposes of this property tax exclusion. Thus, a child who is not formally adopted under the Family Code prior to the age of 18 is not considered a child for purposes of the parent-child exclusion.

9. Question: A husband and wife with two biological children divorce. After the divorce, the ex-wife remarries and her new husband formally adopts the two minor children. Do the children qualify for the parent-child exclusion for property they receive from their biological father after they were adopted?

Answer: No. Children who are formally adopted prior to the age of 18 no longer qualify for the parent-child exclusion for property transferred to them by their former biological parent. Section 63.1(c)(3)(A) defines children as a child born of the parent or parents, except a child who has been adopted by another person or persons before reaching the age of 18. Under this situation, the adoption broke the parent-child relationship between the children and their biological father so that the transfer was not eligible for the exclusion.

STEP- OR IN-LAW RELATIONSHIP

10.Question: How long does a step- or in-law relationship exist?

Answer: Once the marriage on which the relationship is based is terminated by divorce, then the stepparent-stepchild and in-law relationships cease to exist. However, if the marriage is terminated by death, then the stepparent and stepchild or in-law relationship continues to exist until the surviving spouse remarries. At that time, the stepparent and stepchild or in-law relationship ceases to exist.

For example, Husband marries Wife A and has two children. Wife A dies. Husband marries Wife B who already has a child. This child becomes a stepchild of Husband. Wife B dies. Husband marries Wife C. Husband dies and leaves a separately owned property to his two natural children and Wife B's child. However, upon the marriage to Wife C, the step relationship between Husband and Wife B's child ceased to exist. Thus, the parent-child exclusion is available only to the Husband's two natural children and not to the stepchild because the stepparent relationship ceased to exist before the death of the Husband.

11.Question: A father owned real property. In 1998, the father sold property to his son and daughter-in-law, reserving a life estate for himself. In 2001, the son and daughter-in-law divorced. In 2002, the son deeded his remainder interest in the property to his ex-wife. Father died in 2004, which terminated the life estate and caused the ex-daughter-in-law's interest to become possessory. Is she eligible for the parent-child exclusion?

Answer: No. It is the relationship as of the date of the change in ownership for property tax purposes that is relevant to the exclusion. Section 63.1(c)(3)(C) is specific in defining son-in-law or daughter-in-law of the parent and states that the relationship shall be deemed to exist until the marriage on which the relationship is based is terminated by divorce. Since the ex-daughter-in-law is not considered to be a "child" of the parent at the time of the termination of the life estate because she had already divorced the son, the parent-child exclusion is not applicable when her interest in the property became possessory.

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12.Question: A father owned real property. In June 2006, father transferred real property to his daughter and her registered domestic partner. Is this transaction eligible for the parent-child exclusion?

Answer: Yes. Transfers of real property on or after January 1, 2005 between parents and their child and that child's registered domestic partner are eligible for the parent-child exclusion.8 Effective January 1, 2005, Family Code section 297.5(a) provides that registered domestic partners have the same rights, protections, and benefits and are subject to the same responsibilities, obligations, and duties under law, whether they derive from statutes, administrative regulations, court rules, government policies, common law, or any other provisions or sources of law, as are granted to and imposed upon spouses. This section goes on to state in subdivision (j) that it does not amend or modify any provision of the California Constitution or any provision of any statute that was adopted by initiative.

Thus, registered domestic partners are not eligible for any property tax exclusion based on an aspect of a spousal or marital relationship for which the terms spouse and marriage are defined by constitutional provision or by statute adopted by initiative. Since the definition of child in section 63.1 was enacted by the Legislature and not by a ballot initiative or constitutional provision, Family Code section 297.5 controls the definition of "children" in terms of the rights of registered domestic partners. Thus, beginning January 1, 2005, any relationship between parents and children established by registered domestic partnership is accorded the same treatment as if established by marriage for purposes of the parent-child exclusion.

ALLOCATION OF $I MILLION EXCLUSION

13.Question: The purchase or transfer of the first $1 million dollars of full cash value of all other real property can be excluded under section 63.1(a)(2). Is it the current market value that is applied toward a transferor's $1 million limit?

Answer: No. It is the adjusted base year value (also known as the Proposition 13 value) that is applied toward the $1 million limit. Section 63.1(c)(5) provides thatfid/ cash value means full cash value and adjustments as defined in section 110.1 and the full value of any construction in progress determined as of the date immediately prior to the date of a transfer to an eligible transferee. Section 110.1(a) identifies the point in time for which the full cash value was last determined—the 1975 lien date, the date on which a purchase or change in ownership occurs, or the date on which new construction is completed. Section 110.1(f) provides that for each lien date after the lien date for which the full cash value was determined, the full cash value must be adjusted by an inflation factor.

14.Question: How is the allocation of the exclusion to be made where the full cash value of real property exceeds the permissible exclusion?

8 Letter To Assessors No. 2005/017.

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Answer: Within any appraisal unit,9 the exclusion can be applied only on a pro rata basis and cannot be applied to a selected portion or portions of the appraisal unit. I°

For example, a parent died and left five parcels of "other" real property to a child. Each parcel had an adjusted base year value of $400,000 for a combined adjusted base year value of $2,000,000. The exclusion cannot be applied to only the land of each parcel. Instead, the exclusion can be applied to two parcels (total of $800,000) and half of a third ($200,000). The other half of the third parcel and the remaining two parcels must be reassessed to current market value.

15.Question: If more than one eligible transferee claims the $1,000,000 exclusion of a transferor, which transferee receives the exclusion?

Answer: Since both section 2(b) of article XIII A of the California Constitution and section 63.1 use the term "the first one million dollars," it suggests that priority should be based on the timing of the transfers. Where simultaneous transfers are made to two or more qualifying transferees (i.e., date of death), there is no express guidance in the statute. The transferees should agree on an allocation of the exclusion (but see Q.17).

16.Question: How is the $1 million limit tracked?

Answer: The Board monitors the $1 million limitation. The Board maintains a state-wide database of transferors who have been granted the exclusion for "other" real property. While not required to do so, county assessors are encouraged to send quarterly reports to the Board, listing the transferors, their social security numbers, the assessor's parcel numbers, and the excluded value of the parcels.1I On a quarterly basis, the Board sends to county assessors a list of persons who have exceeded the $1 million limit.

17.Question: In February 2003, upon a parent's death, five parcels transferred to two children. Each parcel had an adjusted base year value of $400,000 for a combined adjusted base year value of $2,000,000. The transferees promptly filed a change in ownership statement and claims for the parent-child exclusion. When the Board notified the county assessor that the transferor had exceeded the $1 million limit, the assessor notified the transferees in 2004 that the limit had been exceeded and requested that the transferees determine which properties were to receive the $1 million exclusion. However, the transferees did not respond. If the transferees do not respond before the end of the four-year statutory period to enroll a supplemental assessment, can the assessor make this decision on behalf of the transferees?

Answer: Yes. The assessor can make this decision on behalf of the transferees if they do not respond within a reasonable time. Supplemental and escape assessments for recorded transfers are subject to the four-year statute of limitations under sections 75.11(d)(1) and 532(a). If, after receiving a notice of supplemental or escape assessment, the transferees disagree with the assessor's decision, the assessor can correct the roll to reflect the

9 Section 51, subdivision (d), defines an appraisal unit as that which persons in the marketplace commonly buy and sell as a unit. 1° Section 63.1(d)(2).

Section 63.1(0.

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transferee's allocation under section 4831(a). However, roll corrections can only be made within four years after the making of the assessment that is being corrected.

18.Question: I own property in several counties and have made some partial interest transfers to my children. Do I have to contact each county to find out how much of my $1 million exclusion is available?

Answer: No. Since the Board maintains a state-wide database to track the $1 million exclusion, you may request this information from the Board. While not required to do so, most county assessors voluntarily send quarterly reports to the Board, that list transfers of "other" real property for which the parent-child exclusion has been granted. Information in the database is confidential and available only to certain persons upon written request. The information will not be provided over the telephone, except in the case of an inquiry from a county assessor's office.

19.Question: Both my parents are now deceased, and I am the executor of their estate. I think they used a portion of their $1 million exclusion prior to their deaths. Can I find out how much of their exclusion is available?

Answer: Yes. You may request this information as the executor of your parents' estate. This information is available to the transferor or transferee and their respective spouses, the transferor or transferee's legal representative, or the executor or administrator of the transferee's or transferor's estate. You may write to the County-Assessed Properties Division of the State Board of Equalization and request this information. In your letter, you must state your relationship to the transferor (e.g., trustee, executor, legal representative) and provide the transferor's name and social security number. This information will not be provided over the telephone, except in the case of an inquiry from a county assessor's office.

LEGAL ENTITIES

20. Question: What part do legal entities play in this exclusion?

Answer: None. This exclusion applies only to transfers of real property interests between eligible parents and children. This exclusion does not apply to transfers between parents and children of ownership interests in legal entities, such as partnership interests or corporate stock.

21. Question: Mom and Dad owned real property that they subsequently proportionally transferred to their limited liability company (LLC). Because this proportional transfer was excluded from reassessment under section 62(a)(2), Mom and Dad became original coowners under section 64(d). Dad died in 2004. Upon Mom's death in 2006, two children inherited the LLC interests. The transfer of more than 50 percent of the original coowners' interests was a change in ownership under section 64(d). However, because this was a transfer between parents and children, wouldn't the transfer be eligible for the parent-child exclusion?

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Answer: No. In this situation, the children inherited interests in the LLC, not real property. Section 63.1(c)(8) expressly provides that, for purposes of the parent-child exclusion, "real property" does not include interests in legal entities.

22. Question: Mom and Dad owned property through their trust and subsequently transferred the property proportionally to their family partnership, also owned by the trust. Dad died in 2004. Upon Morn's death in 2006, the trust became irrevocable and their two children became present beneficial owners of the trust. Because this was a transfer via the trust, is this transfer eligible for the parent-child exclusion?

Answer: No. In this situation, the children inherited interests in the partnership, not real property. Property Tax Rule 462.160(b)(1)(C) provides that a change in ownership of real property held by a legal entity occurs if section 61(i), 64(c), or 64(d) applies because the change in ownership laws governing interests in legal entities are applicable regardless of whether such interests are held by a trust.

23 Question: Mom owned real property and subsequently transferred it to her single-member limited liability company. When Mom dies and her children inherit the property, will this transfer be eligible for the parent-child exclusion?

Answer: No. Even though a single-member limited liability company may be disregarded for federal income tax purposes, its affairs are governed by all of the formalities imposed on all other legal entities (e.g., corporations, partnerships, etc.). Thus, it is treated as a separate legal entity for California property tax purposes, with transfers of membership interests subject to the provisions of section 64.12

STEP TRANSACTION DOCTRINE

24. Question: Does the step transaction doctrine apply to legal entity transfers between parents and children when they structure a transaction in a series of steps in order to use the parent-child exclusion?

Answer: No, provided the transaction is consistent with the statement of legislative intent contained in the uncodified note in Chapter 48 of the Statutes of 1987 (the legislation which added section 63.1 to the Revenue and Taxation Code), which allows the parent-child exclusion for certain step transactions involving legal entities.

For example, Corporation A (wholly owned by parents) transfers real property proportionally to parents who then transfer the same real property to their child who transfers the same real property to Corporation B (wholly owned by child). The step transaction doctrine treats a series of nominally separate transactional steps as a single transaction if the steps are, in substance, interdependent and intended for a particular result. In such circumstances, however, the step transaction doctrine would not apply, and the property may be excluded under the parent-child exclusion pursuant to the statement of legislative intent. Please note that the child must file the parent-child claim form before the property is transferred to Corporation B (a third party transfer).

12 Annotation 220.0375.015.

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25 Question: A mother owns real property. She transferred the property to a family partnership, in which the mother and her two children equally own partnership shares. Because the children are not receiving property directly from their mother, but rather are receiving ownership rights in the property indirectly through their ownership interests in the legal entity, such transaction would not qualify for the parent-child exclusion. However, the mother argues that the end result would have been the same if multiple steps had been taken (first, mother transfers the real property from mother to mother and children; second, both the mother and the children proportionally transfer their interests in the real property to the legal entity). Thus, the mother argues that this transaction should be treated as a single transaction under the step transaction doctrine, i.e., the transfer of real property interests from a parent to her children. Does this type of transaction qualify for the parent-child exclusion?

Answer: No. In Penner v. County of Santa Barbara (1995) 37 Cal.App.4th 1672, the court of appeals held that the definition of "children" as set forth in section 63.1(c)(3) "includes only natural persons with a familial relationship to one another." The court acknowledged that if the mother had first transferred the real property interests to herself and the children, and, thereafter, they had transferred the same proportional interests in the partnership, the first transfer would have been excluded from change in ownership as a transfer between a parent and her children and the second transfer would have been excluded under section 62(a)(2). In response to the argument that the parent-child exclusion should apply because the end result was the same, the court refused to depart from the plain meaning of the language of the statute. The step transaction doctrine allows certain steps actually taken to be ignored; however, it does not allow a taxpayer to invent steps that never existed.

26. Question: Can a transfer from grandparent to parent, followed by a transfer from parent to child, each qualify for the parent-child exclusion?

Answer: Yes, as long as each transfer is unrestricted. Chapter 48 of the Statutes of 1987 states that it is the intent of the Legislature to liberally construe section 63.1 to carry out the purpose of Proposition 58. Therefore, as long as each transfer is unrestricted and is otherwise eligible (e.g., between parents and children), the exclusion is applicable. However, if the parents were required to transfer the property to their child (that is, the grandchild), then the step transaction doctrine would apply and these steps would be collapsed into one transaction, i.e., a transfer from grandparent to grandchild. Since the parents are living, the grandparent-grandchild exclusion would not apply, and this transaction would not be excluded from change in ownership. The assessor can collapse the steps together under the step transaction doctrine if evidence exists that proves that the intent was for the grandchild to have the property.

TYPES OF TRANSACTIONS

27. Question: If a parent who owns real property dies and his child inherits the property, does

this transfer qualify for the exclusion if the property was not purchased by the child?

Answer: Yes. The mode of transfer is not an issue. Any transfers of real property between parents and children are eligible for the parent-child exclusion, whether by means of a sale, a

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gift, a joint tenancy transfer, an inheritance, or an intestate transfer. If the child meets the family relationship requirements of section 63.1, files a claim, and the value of the property is within the $1 million limit (if applicable) or was the parent's principal residence, then the transfer qualifies for the exclusion. The parent-child exclusion applies to both voluntary and involuntary transfers and transfers resulting from a court order or judicial decree.

28. Question: My mother could not make her house payments and the bank foreclosed. If I purchase her property from the bank at the foreclosure sale, would this purchase be eligible for the parent-child exclusion?

Answer: Yes. If a mother's primary residence is in foreclosure and the child purchases the residence at a foreclosure sale, such purchase would be considered a purchase or transfer between a parent and child under section 63.1(c)(1) if, in fact, the sale was made by the mother herself and not by an intermediary, such as a trustee in the course of a foreclosure sale. 13

29. Question: A parent annually transfers a two percent interest in his property to two children. The market value of the four percent interest is less than $10,000. Do the children have to file for the parent-child exclusion for such small amounts?

Answer: If the interests transferred during each assessment year have a market value of less than five percent of the value of the total property and are worth less than $10,000 in market value, then the transfers may be excluded under section 65.1(a) as a de minimis transfer. No parent-child exclusion claim is necessary for the de minimis exclusion.

On the other hand, if the transfers during any assessment year cumulatively exceed the limit under section 65.1(a), then all the transfers will be subject to change in ownership. In this situation, then the transferees can file for the parent-child exclusion.

TRUSTS

30. Question: Are transfers of real property through the medium of a trust eligible for the parent-child exclusion?

Answer: Yes. For property tax purposes, we look through the trust to determine who has present beneficial ownership. If the requirements of section 63.1 are otherwise satisfied, transfers to and from a trust are eligible for the exclusion.

31. Question: Parents owned property via a trust. Upon the husband's death in 1985, his interest transferred to an irrevocable trust in which his wife was the sole income beneficiary for life and also had the power to invade the principal for reasonable health, education, and support. Their children held the remainder interests. Upon wife's death in 2005, can the children file for the $1 million exclusion from both the mother and father?

13 Annotation 625.0085.

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Answer: Yes. The language and intent of section 63.1(b)(2) allow a full $1 million exclusion to each eligible transferor who has an ownership interest in real property. Thus, even though the husband predeceased the wife, husband and wife each retain a separate $1 million exclusion. Since the husband became an eligible transferor relative to his property interests when he died, the remainder interests become possessory (i.e., present beneficial interests vest in his children) upon the wife's death, making his $1 million exclusion available when the irrevocable trust for her benefit terminates.

32. Question: In 1990, a husband transferred two parcels of separate real property to his children and used his $1 million exclusion. The husband and wife jointly own other property held in a trust. Upon the husband's death in 1995, the trust was split into two trusts. The husband's interest in the real property transferred to an irrevocable Trust A in which his wife was the sole income beneficiary for life and also had the power to invade the principal for reasonable health, education, and support. The wife's interest transferred to Trust B. Their children held the remainder interests. Upon the wife's death in 1999, can the wife's $1 million exclusion apply to all the property since the husband already used his exclusion?

Answer: No. Only the share of the property owned by the wife can be applied to her $1 million exclusion. If property was jointly owned, only the wife's share can be excluded. The husband's share would be reassessable because he already used his $1 million exclusion.

33. Question: Mom and Dad transferred real property to their trust in which they were the present beneficial owners. When Mom and Dad died, their trust became irrevocable. The trust provides that their son, daughter and nephew are the income beneficiaries for life. The trust also provides that the trustee can distribute income to any one or all of them at any time. If the trustee distributes income only to the son and daughter, is this eligible for the parent-child exclusion?

Answer: No. Since the trust provides that the present right to receive distributions of the trust income goes to the son, daughter, and nephew, each child and the nephew are considered "present beneficial owners." Since the nephew has no exclusion and the trustee could distribute all of the trust property to him at any time, all of the property is considered to have changed ownership even if the trustee distributes the income only to the son and daughter.14

34. Question: A father transfers his real property into his trust, which became irrevocable upon his death. The distribution of his assets is a private matter. Can the trustee provide a certification of the trust to the assessor rather than a copy of the entire trust?

Answer: No. A certification of the trust does not state the names of the beneficiaries or the real property interests owned by the trust—information that the assessor needs to make a determination whether the exclusion applies. The California courts have long recognized that a taxpayer is required to provide any relevant information requested by the assessor for

14 Property Tax Rule 462.160(b)(1)(A).

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property tax assessment purposes.' 5 If a taxpayer fails to furnish complete information necessary to enable the assessor to make an exclusion eligibility determination, the assessor must still perform that statutory duty even if based upon incomplete evidence, which may result in a denial of the exclusion.

A claimant is required to provide information sufficient to support the claim as a condition of receiving the exclusion. Evidence about the identity and interests of the trust beneficiaries, the powers of the trustee to distribute the trust property and assets, and other terms relevant to the disposition of the trust assets is necessary for the assessor to determine whether the parent-child or the grandparent-grandchild exclusion applies. Thus, it is necessary for the trustee to provide an entire copy of the trust rather than a mere certification of the trust.

SHARE AND SHARE ALIKE

35. Question: Mom, an owner of real property, dies. Her will leaves her property jointly to her two sons. The will contains a provision that allows the executor to distribute the property in kind on a pro rata or non-pro rata basis. If the property is distributed to the sons on a non-pro rata basis, will the parent-child exclusion apply?

Answer: Yes. If the market value of the real property does not exceed that child's share of the entire estate, then the distribution of real property to one child may be excluded under the parent-child exclusion.16

Distributions of real property from an estate are not always made on a pro rata basis. Probate Code section 16246 provides that:

The trustee has the power to effect distribution of property and money in divided or undivided interests and to adjust resulting differences in valuation. A distribution in kind may be made pro rata or non pro rata, and may be made pursuant to any written agreement providing for a non pro rata division of the aggregate value of the community property assets or quasi-community property assets, or both.

However, notwithstanding this statutory provision, the intention of the testator as expressed in the will controls the legal effect of the dispositions made in the will.17 Thus, if the testamentary instrument does not specifically prohibit non-pro rata allocations, then it is assumed that the executor has broad discretionary powers. Thus, for example, Child A may receive real property and Child B may receive stocks and bonds equal in value. However, if the will specifically provides that Child A receives principal residence X and Child B receives rental property Y, then the executor has no discretion to alter the distribution scheme.

36. Question: A trust allows for non-pro rata distribution. However, the estate is composed primarily of a house and a small savings account. One child wants the real property and one

15 See Simms v. Pope (1990) 218 Cal.App.3d 472, 477; Domenghini v. County of San Luis Obispo (1974) 40 Cal.App.3d 689, 695. 16 Letter To Assessors 91/08. 17 Estate of Russell (1968) 69 Cal 2d 200.


child wants cash. To equalize distribution, can the trust encumber the real property with a loan and will the transfer of real property still qualify for the parent-child exclusion?

Answer: Yes. When a trustee has the power to distribute trust assets on a pro rata or non-pro rata basis, the distribution of real property to one child qualifies for the parent-child exclusion if the value of the property does not exceed that child's interest in the total trust estate. A trustee who elects to make a non-pro rata distribution may equalize the value of the other beneficiaries' interests in the trust assets by encumbering the real property with a loan and distributing the loan proceeds to the other beneficiaries. 8 However, a loan cannot be made by any of the beneficiaries of the real property to the trust in order to equalize the trust interests. Such loan would be considered payment for the other beneficiaries' interests in the real property resulting in a transfer between beneficiaries rather than a transfer from parent to child, which would disqualify the transfer from the parent-child exclusion.

Example 1: M died leaving three children A, B, and C. At the time of M's death, M's residence was worth $350,000. M also owned a 50 percent interest in a warehouse valued at $200,000 and a portfolio of stocks and bonds with a value of $200,000. The executor proposes to encumber the residence with a $100,000 loan and distribute the residence to A, the portfolio plus $50,000 cash to B, and the 50 percent interest in the warehouse plus $50,000 cash to C. Since each child is receiving an equal share of M's estate ($250,000 in value) and the value of each real property does not exceed that child's share of the estate, the real properties may be excluded under the parent-child exclusion if a timely claim is filed.

Example 2: Same facts as in Example 1, however, instead of the executor encumbering the residence with a $100,000 loan, Child A, who wants to receive the residence, proposes to loan the trust the $100,000. Such loan would disqualify the transfer from the parent-child exclusion because such transaction would be considered a loan between the beneficiaries.

Example 3: Same facts as in Examples 1 and 2, however, instead of Child A providing the trust the $100,000 loan, Child C proposes to loan the trust the $100,000. Under these facts, because the child who is receiving the property with the encumbrance is not the same child making the loan to the trust, the property will qualify for exclusion.

37. Question: Mother, an owner of real property, dies, and her will leaves her properties jointly to her two sons. The court ordered the properties to be distributed jointly to the two sons. However, the two sons did not wish to jointly own property with each other. Thus, son A conveys his interest in parcel 1 to son B, and son B conveys his interest in parcel 2 to son A, resulting in son B owning parcel 1 and son A owning parcel 2. These deeds were recorded simultaneously after distribution. Would these transactions qualify for the parent-child exclusion?

Answer: No. While the distribution of parcels 1 and 2 jointly to the two sons upon the death of their mother is excludable from change in ownership under section 63.1, the subsequent transfers between the siblings would not be excluded and would be considered reappraisable events. Since the court ordered joint distribution in accordance with Mother's will, the subsequent transfers would be considered as transfers between siblings and not a redistribution of estate assets. Thus, the transfer of son A's interest in parcel 1 to son B and

IS Annotation 625.0235.005.

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the transfer of son B's interest in parcel 2 to son A would trigger a 50 percent reappraisal of each parcel.

LEASES

38. Question: A child owns real property that he has leased to his mother and his uncle for a term of 99 years. Does the parent-child exclusion apply to this situation?

Answer: Yes. Section 61(c) provides, in part, that the creation of a leasehold interest in taxable real property for a term of 35 years or more is a change in ownership; thus, where such a leasehold is created, a change in ownership has occurred for property tax purposes. Such transfers may be excluded from change in ownership under the parent-child exclusion. Accordingly, the property subject to the lease may be excluded from change in ownership to the extent of the mother's ownership in the property within the limitations of section 63.1.

LIFE ESTATES

39. Question: A mother died. In her will she granted a life estate in real property to a friend with the remainder to the mother's children. Should the parent-child claim be filed upon the death of the mother or the termination of the life estate?

Answer: The parent-child claim should be filed when the children's interest becomes possessory upon the termination of the mother's friend's life estate. A reappraisable change in ownership occurs when a life estate is created if it vests in a person other than the transferor, the transferor's spouse, or the transferor's registered domestic partner.19 Similarly, another change in ownership occurs when the life estate terminates and the property transfers to the remainder person unless an exclusion applies. Thus, under these facts, a change in ownership occurred when the life estate was created because it vested in mother's friend upon mother's death. However, the children's rights in the property do not become possessory (i.e., they do not vest) until the termination of the mother's friend's life estate. Thus, the filing period for the parent-child exclusion does not begin to run until their interest becomes possessory upon the death of the life estate holder. Assuming the parent-child claim is timely filed, the property will not be reassessed upon the termination of the life estate. It will retain the base year value determined when the life estate was created.

40. Question: An owner of real property died testate. In her will she left a residence to her sister-in-law for her life with the remainder interest to her nephew, her sister-in-law's son. Eight years later, the sister-in-law transfers her life estate to her son by quitclaim deed. Is the sister-in-law's transfer to her son excluded from change in ownership by the parent-child exclusion?

Answer: Yes. In this situation, the sister-in-law's transfer of her life estate to her son resulted in a merger of the life estate and the remainder interest. Since the merged interest is considered to have been received from the life tenant (his mother), the parent-child exclusion applies.2°

19 Property Tax Rule 462.060(a). 20 Annotation 220.0372 and 220.0372.015.

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41 Question: A mother recorded a deed in which she transferred ownership of her real property to three of her four children, but reserved a life estate for herself. The three children gave 25 percent of their remainder interest to their sibling, the fourth child. Upon the death of the mother, is the entire property eligible for the parent-child exclusion?

Answer: No. Only the interest that passed to the three children from their mother is eligible for the parent-child exclusion. The 25 percent that the fourth child received was granted by the siblings, not the mother. Thus, that 25 percent is subject to reassessment as a sibling-to-sibling transfer.

LIFE ESTATE — DISCLAIMER

42. Question: Grandfather records a deed in which he gives a life estate to his grandson with the remainder to the grandfather's son. If the grandchild disclaims any interest in the grandparent's property, can the transfer of real property qualify for the parent-child exclusion?

Answer: Yes. Probate Code section 265 defines a "disclaimer" as any writing which declines, refuses, renounces, or disclaims any interest that would otherwise be taken by a beneficiary. "Beneficiary" means the person entitled, but for the person's disclaimer, to take an interest (Probate Code section 262). A properly executed and filed disclaimer results in the interest disclaimed descending and being distributed as though the disclaimant had predeceased the creator of the interest. Being treated as deceased and being deceased are not the same. Thus, under this scenario, if the grandson disclaims his life estate interest, then the property will pass from grandfather to grandfather's son, and would be eligible for the parent-child exclusion.

DATE OF CHANGE IN OWNERSHIP

43. Question: A mother died in 1985. After a lengthy probate, her estate was distributed to her surviving children in 2006. What is the date of change in ownership for purposes of this exclusion?

Answer: Generally, the date of death is the date of change in ownership.21 However, under Larson v. Duca (1989) 213 Cal.App.3d 324, the date of a judicial decree of distribution can be considered the date of change in ownership for purposes of applying the parent-child exclusion when the decedent parent or child died prior to November 6, 1986 and the judicial decree of distribution of the court in which the decedent's estate was probated occurred after November 6, 1986. Only under these circumstances will the change in ownership occur on the date of distribution of the property in probate proceedings rather than on the date of death. Larson does not apply to properties held in trust or joint tenancy because these types of estate plans avoid probate upon the date of death.

21 Property Tax Rule 462.260(c).

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CLAIMS

44. Question: When must a claim for exclusion be filed?

Answer: To receive property tax relief as of the date of the transfer of real property, claims must be filed within three years after the date of the transfer or prior to the transfer of the real property to a third party, whichever is earlier. If the assessor mails a notice of supplemental or escape assessment after the expiration of either of these filing periods, a claim is considered timely if it is filed no later than six months after the date of mailing of notice of supplemental or escape assessment. If a claim is not filed timely, relief can be granted prospectively only if the property is still owned by the transferee.

45. Question: What is a transfer to a third party?

Answer: A transfer to a third party is a transfer that is subject to reassessment and not otherwise excluded by the parent-child exclusion. Section 63.1(e)(4) expressly provides that a transfer to a parent or child of the transferor is not considered a transfer to a third party.22

For example, a mother bequeathed her home to her adult daughter. The daughter did not know of the parent-child exclusion and had, in turn, transferred the property to her own child (the mother's grandchild). The filing period for the first transaction is not foreclosed by the subsequent transfer to the grandchild, since this transfer is not considered a transfer to a third party. However, until the daughter files a claim, the base year value that is set as of the date the daughter acquired the property would remain intact.

Meanwhile, in order to receive retroactive relief, the grandchild's filing period is within three years of the second transfer or before a transfer to a third party, whichever is earlier, or within six months of a notice of supplemental or escape assessment on the second transfer. If both the parent and the grandchild file claims, then both transfers may be excluded from change in ownership as long as the grandchild has not transferred the property to a third party who is not eligible for the parent-child exclusion. Finally, the grandchild may file for prospective relief on the transfer from the parent at any time, provided the grandchild has not transferred the property to a third party who is not eligible for the parent-child exclusion.

46. Question: A mother's real property was held in a trust when she died in 2002. More than three years has passed and the trustee has not yet distributed the property to mother's son, the sole beneficiary. Thus, the three-year statutory period in which to apply for the parent-child exclusion has passed. Does the son have to wait to file the claim until after he receives a notice of supplemental or escape assessment (i.e., the beginning of the six-month filing period)? Or, can the assessor's office accept a filing of the parent-child exclusion form as timely before processing corrections and opening the six-month window for filing?

Answer: The assessor can accept a completed form as timely before officially beginning the six-month filing period. The Legislature added paragraph (C) to section 63.1(e)(1) to extend the filing period for claimants who otherwise would have been ineligible under the previous requirements.23 Under paragraph (C), a claim filed after either the transfer-to-a-third-party

22 See Letter To Assessors 2000/005. 23 See Letter To Assessors 94/21.

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deadline or the three-year deadline, as applicable, will nevertheless be timely if the filing is made no later than six months after the mailing of a notice of supplemental assessment required by section 75.31 or the notice of escape assessment required by section 534.

47. Question: What is meant by "prospective relief?"

Answer: If a claim is filed after the conclusion of the specified filing periods described above, the exclusion may be granted as of the year that the claim is filed, but will not be back-dated to the date the transfer actually occurred. Section 63.1 (e)(2) provides that any exclusion granted for a claim that is filed subsequent to the expiration of the filing periods shall apply commencing with the lien date of the assessment year in which the claim is filed. For example, untimely claims filed in 2006 shall apply as of the 2006 lien date (January 1, 2006) for the 2006-07 fiscal year, but not for any prior years.

48. Question: In 2003, a father gave his son real property that the father had owned. The son filed a preliminary change of ownership report that indicated a parent-child transfer had occurred. No parent-child exclusion claim was filed. Subsequently, the assessor reassessed the property and the son received a supplemental assessment property tax bill. Isn't this exclusion automatic? Wouldn't the preliminary change in ownership report be sufficient to grant the exclusion?

Answer: No. Section 63.1(d)(1) requires that a claim be filed before the exclusion can be granted and that both the transferor and transferee must certify under penalty of pet:jury as to the parent-child relationship. Section 63.1(e)(1) requires that the Board prescribe the form for claiming eligibility. The preliminary change in ownership report is not sufficient because it does not contain the proper certification for the parent-child exclusion.

49. Question: The claim form for the parent-child exclusion is a Board-prescribed form. Why isn't it on the Board's website?

Answer: If a form is prescribed by the Board, this means the Board sets the language to be used by all 58 counties; however, we do not create the document. Rather, the county assessor adds the county name and address to the form, and creates the claim form for use by taxpayers within his or her county. The claim form may be available from a county assessor's website. A list of county assessors and links to their websites (if available) is contained on the Board's website at wvvw.boe.ca.gov/proptaxes/assessors.htm.

CLAIMS - SIGNATURE REQUIREMENTS

50. Question: Who can sign the claim form?

Answer: Section 63.1(d)(1)(A) and (B) specifically requires written certification attesting to the parent-child relationship under penalty of perjury from both the transferee and the transferor, or the executors of their estates or their legal representatives. (A legal representative is one who has been duly authorized and has been given appropriate power.) In instances where there are multiple transferees, section 63.1(d)(1)(D) allows one transferee to sign on behalf of the other transferees. However, there is no similar language for

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transferors. Thus, if there is more than one transferor, each transferor must sign the claim form."

If the property is in a trust, the trustee can sign on behalf of the transferor because the trustee has the legal obligation to carry out the terms of the trust. If the property is in bankruptcy, the trustee assigned by the bankruptcy court may sign the form on behalf of the transferor.

51. Question: A father transferred real property to his son and now refuses to sign the claim form. Can the son provide proof of the relationship in lieu of the father signing the claim form?

Answer: In this regard, it is important to note that the exact language of the statute does require the transferor's signature on the claim, but rather requires that the transfer shall submit "A copy of written certification by the transferor.. .made under penalty erjury that the transferor is a parent...of the transferee." Section 63.1(d) requires transferee to file the claim; and section 63.1(d)(1)(B) requires written certificat' as to parenthood and certification that the property transferred is the transf s principal residence. The transferor's signature on the claim form is the standa ed method approved by the Board for the assessor to obtain such written certifica required by the statute. The lack of the transferor's signature would not preclud n assessment appeals board from determining whether there is sufficient indepen evidence to satisfy the statute. If, for example, there are other forms or writingsieffs, court documents, tax returns, etc., signed under oath or penalty of perjury, wl • indicate the parent-child relationship, then such documentation could satisfy the quirement of "written certification by the transferor." Similarly, other documents ight be used to certify that the property was the principal residence of the pare' he weighing of such evidence, of course, and the ultimate conclusion to which it

ads are questions of fact entirely within the purview of the assessment appeals board.

Obsolete language - See LTA 2003/018

RESCISSION

52. Question: May an assessor allow a claimant to rescind a parent-child or grandparent-grandchild claim for exclusion?

Answer: Yes, even though there is no express statutory authorization for such action. Under the basic principles of tax law, the taxpayer has the right to elect whether to claim a tax benefit or not, and if the benefit is voluntary, the taxpayer is not forced to take it. However, both parties to the transaction must agree to the rescission. Thus, if one of the parties is now deceased, then the rescission cannot be granted because the deceased party cannot agree to the rescission.

In addition, if the change in ownership occurred more than four years prior to the rescission request, the assessor can only issue escape assessments for four years under section 532, the statute of limitations period for escape assessments.

24 Letter To Assessors 2003/018.

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GRANDPARENT-GRANDCHILD EXCLUSION QUESTIONS AND ANSWERS

1. Question: Can any transfer of real property between grandparent and grandchild qualify for exclusion from change in ownership?

Answer: No. Not all transfers of real property between grandparent and grandchild qualify. Such transfers may be excluded only under certain circumstances. In fact, only transfers from a grandparent to a grandchild may qualify (and not vice versa) if all other specified circumstances are met (i.e., transfers from a grandchild to a grandparent do not qualify for exclusion). Other requirements that must be met is that all of the parents of the eligible transferees who qualify as "children" of the grandparents have died or, in the case of an in-law, have divorced or remarried. Thus, the exclusion applies where the parent of the grandchild has predeceased the grandparents and the in-law either remarried after the death of the spouse or was divorced from the deceased prior to death. However, beginning January 1, 2006, an in-law who is a stepparent of the grandchild need not be deceased.

2. Question: Why is the grandparent-grandchild exclusion so limiting?

Answer: The application of the grandparent-grandchild exclusion is consistent with the intent of Proposition 193. The vehicle which put Proposition 193 on the ballot was Assembly Constitutional Amendment 17, carried by Assemblyman Knowles. In the California Ballot Pamphlet, Assemblyman Knowles stated in the "Argument in Favor of Proposition 193" that this proposition was authored to allow taxpayers to decide "whether to permit property to be transferred from grandparents to their own grandchildren only in cases where both parents are deceased, so that California families who are caught in this unfortunate situation are not punished due to mere oversight in the law." Assemblyman Knowles noted further: "It will be an uncommon family to whom this new tax provision will apply, and therefore this measure will have minimal revenue consequence on state or local governments."

PRINCIPAL RESIDENCE

3. Question: How many principal residences can be transferred by a grandparent to a grandchild under section 63.1?

Answer: Just as with the parent-child exclusion, there is no limit to the number or the value of principal residences transferred from a grandparent to a grandchild so long as the grandchild has not received a principal residence from his parent that was excludable under section 63.1. If the grandchild received a principal residence from a parent that was excludable under section 63.1, then any principal residence received from a grandparent would be considered "other real property" and counted against whatever is remaining from the grandchild's deceased parent's $1 million exclusion.

$1 MILLION EXCLUSION TRACKING

4. Question: The application for the grandparent-grandchild exclusion does not ask for the grandparent's tax identification number. Is this an oversight?

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Answer: No. Because the grandparent-grandchild exclusion is an extension of the parent-child exclusion, real property excludable under the grandparent-grandchild exclusion is counted against the grandchild's deceased parent's $1 million exclusion. If the parent used his or her entire $1 million exclusion while alive, then no exclusion is available for the grandparent-grandchild transfer.

MIDDLE GENERATION LIMITATION

5. Question: A grandfather died and left real property to his grandson. The grandfather's daughter has been declared mentally incapacitated and is in a care home. The daughter has never been married. Is the grandson eligible for the grandparent-grandchild exclusion?

Answer: No. The grandparent-grandchild exclusion from change in ownership is available only when all of the parents of the eligible transferees who qualify as "children" of the grandparents have died or, in the case of an in-law, have divorced or remarried. Since his mother (grandfather's daughter) is alive, the grandson is not eligible for the exclusion.

6. Question: A daughter had a son. After the son was born, the daughter married a prison inmate who was not the son's father. Several years later, the daughter died. Thereafter, on August 1, 2006, the grandfather died and left real property to his grandson (daughter's son). The daughter's husband had not remarried. Is the grandson eligible for the grandparent-grandchild exclusion?

Answer: Yes. The daughter's husband is a stepfather to her son. Commencing January 1, 2006, the provisions that require a parent who is a child of the grandparent to be deceased do not apply to an in-law child who is a stepparent of the grandchild.

IN-LA W CHILD

7. Question: A grandfather died and left real property to his grandson. The grandfather's daughter (grandson's mother) was legally separated from her husband (grandson's father) at the time of her death. Would that be the same as divorced for this purpose?

Answer: No. Section 63.1(c)(3)(C) specifically states that an in-law is a child of the parent until the marriage on which that relationship is based is terminated by divorce. Legally separated is a temporary situation that may or may not end in divorce. A divorce decree is a final judgment that terminates a relationship. Until the divorce is final, the in-law relationship still exists.

MISSING PARENT

8. Question: Can a transfer of real property between grandparent and grandchild qualify for exclusion from change in ownership if the whereabouts of the parent of the grandchild is unknown?

Answer: Yes, if the date of death of the parent is established. When a person has been missing for over five years, the estate may be administered as that of a decedent by invoking the presumption of death from five-years absence created by Evidence Code section 667. A

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person may file a petition in court pursuant to Probate Code sections 1804 et seq., which provides a procedure for the final distribution of property of an absent person without recourse by him if he has been missing for the requisite period of time.

DISCLAIMER

9. Question: Can a transfer of real property between grandparent and grandchild qualify for exclusion from change in ownership if the parent disclaims any interest in the grandparent's property?

Answer: No. Probate Code section 265 defines a "disclaimer" as any writing which declines, refuses, renounces, or disclaims any interest that would otherwise be taken by a beneficiary. "Beneficiary" means the person entitled, but for the person's disclaimer, to take an interest (Probate Code section 262). A properly executed and filed disclaimer results in the interest disclaimed being distributed as though the disclaimant had predeceased the creator of the interest. However, being treated as deceased for purposes of a disclaimer and being deceased are not the same. Thus, for purposes of the grandparent-grandchild exclusion, the parent must actually be deceased prior to the transfer in order for the transfer of real property from the grandparent to the grandchild to qualify for exclusion.

ADOPTION

10.Question: Does a natural grandchild qualify as an eligible transferee of her natural grandmother if the grandmother's daughter (grandchild's mother) was legally adopted as a minor by another mother and father?

Answer: No. Based on the definition in section 63.1(c)(4), a "grandchild" means any child of the child of the grandparent. For purposes of the grandparent-grandchild exclusion, the grandchild's mother ceased to be the "child of the grandparent" when she was legally adopted by another set of parents.

11 Question: A son predeceased his mother (grandmother). At the time of his death, the son was divorced from his son's (grandson) mother and had not remarried. The son's ex-wife had remarried and after her ex-husband's death, her new husband formally adopted her child (grandson) at age 19. The paternal grandmother left real property to the grandson. Does he qualify for the grandparent-grandchild exclusion?

Answer: Yes. Section 63.1(c)(4) defines "grandchild" as "any child of the child of the grandparent." At the time of the son's death, the son was a child of the grandmother and the grandson was a child of the son. The marriage on which the daughter-in-law's relationship with the grandparent was based, ceased to exist when, after her husband's death, she remarried. Furthermore, the adoption by the new husband was of no effect because, under subdivision (c)(3)(D), the term "child" is defined as any child adopted by the parents if under the age of 18. Since the grandson was adopted at age 19, the adoption did not erase the biological relationship between the son and the grandson for purposes of the grandparent-grandchild exclusion. Thus, the transfer from the grandparent to the grandson qualifies because as of the date of transfer, the grandson was a child of the son, the grandmother's son was deceased, and his ex-wife did not meet the qualification of "child"

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under section 63.1(c)(3)(C) because the relationship of parent and daughter-in-law was terminated by his death and her remarriage.

STEP GRANDCHILD

12.Question: A grandfather had a son who married a woman who already had two children (son's stepchildren). The son passes away. Wife (stepchildren's natural mother) does not remarry and passes away. Subsequently, the grandfather dies and leaves real property to his deceased son's stepchildren. Will transfers of real property from a grandfather to his step grandchildren qualify for exclusion?

Answer: Yes. Under section 63.1(c)(3)(B), a "child" is defined as "any stepchild of the parent or parents and the spouse of that stepchild while the relationship of stepparent and stepchild exists...[T]he relationship of stepparent and stepchild shall be deemed to exist until the marriage on which the relationship is based is terminated by divorce, or, if the relationship is terminated by death, until the remarriage of the surviving stepparent." In this case, the criterion for the grandparent-grandchild exclusion was met on the date of the transfer. That is, all of the "parents" of the grandchildren who qualify as the "children" of the grandparents were deceased.2) The grandchildren are thus qualified for this exclusion.26 Even though the stepchildren are no longer considered children of the stepfather because the step relationship terminated with stepfather's death, they are still considered grandchildren of the stepfather's parents because the step relationship was not terminated by remarriage.

13.Question: A grandmother owns real property. The grandmother's daughter married a man with a son (stepson). The daughter died and her husband remarried, breaking the in-law relationship with her mother (grandmother). Can grandmother transfer her property to her ex-son-in-law's son and qualify for grandparent-grandchild exclusion?

Answer: No. Under section 63.1(c)(3)(B), a "child" is defined as "any stepchild of the parent or parents and the spouse of that stepchild while the relationship of stepparent and stepchild exists...[T]he relationship of stepparent and stepchild shall be deemed to exist until the marriage on which the relationship is based is terminated by divorce, or, if the relationship is terminated by death, until the remarriage of the surviving stepparent." In this case, the transfer of property from the grandmother to her daughter's stepson would not qualify for the grandparent-grandchild exclusion because the father had remarried after the daughter's death. When the father remarried, the in-law relationship ceased to exist.27

GREAT-GRANDCHILD

14.Question: Is a great-grandchild eligible for the grandparent-grandchild exclusion?

Answer: No. The exclusion under section 2(h) of article XIII A of the California Constitution and section 63.1 applies to transfers of real property (1) between parents and children, and (2) from grandparents to grandchildren under limited circumstances. A

25 Section 63.1(c)(2). 26 Section 63.1(c)(3)(B). 27 Section 63.1(c)(3)(C).

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great-grandchild does not meet the definition of "child" or "grandchild" under section 63.1(c)(3) or (c)(4).

LIFE ESTATE

15.Question: Does the grandparent-grandchild exclusion apply when a grandchild receives the remainder interest upon the termination of a life estate granted to his/her parent who qualified as the "child" of the grandparent/trustor?

Answer: Yes, as long as the limitations of the grandparent-grandchild exclusion are met. If the facts indicate that the grandparent is the grantor of lifetime interests, and she designates that the remainder interest in the trust property shall transfer to her grandchildren upon the death of the lifetime beneficiaries, she is the "eligible transferor" to her grandchildren for purposes of this exclusion. Whether the grandchildren qualify as "eligible transferees" under the exclusion depends in each case on whether all of their parents who qualify as "children" of the grandparent are deceased at the time of the transfer. This requires a factual determination to be made by the assessor based on the facts submitted by the taxpayer on the claim form (and other documentation).

LARSON V. DUCA

16.Question: A grandmother died in 1985. After a lengthy probate, her estate was distributed to her surviving children and grandchildren in 1997. Since the only parent of the grandchildren predeceased the grandmother, will the property inherited from the grandmother qualify for the exclusion under Larson v. Duca, 213 Cal. App. 3d 324 (1989)?

Answer: No. This is a grandparent-grandchild exclusion and not a parent-child exclusion. The Larson v. Duca court case is a very narrow decision which is limited to the facts of the case. The court stressed that it intended only to deal with parent-child benefits (Proposition 58). Thus, an assessor should apply the holding of this case only to parent-child cases that fall within the described facts of this case—the decedent parent or child died prior to November 6, 1986, and the judicial decree of distribution of the court in which the decedent's estate was probated occurred after November 6, 1986. Only under these circumstances will the change in ownership occur on the date of distribution of the property in probate proceedings rather than on the date of death. Larson does not apply to properties held in trust or joint tenancy.

STEP TRANSACTION

17 Question: Parents formed a family limited partnership (LP1) to which they transferred real property, maintaining the same percentage of ownership so that such transfer was excluded under section 62(a)(2). Subsequently, the parents gave 49 percent of the LP1 ownership interests to their children and grandchildren. Next, the family dissolves LP1 and transfers the real property proportionally to the parents, children, and grandchildren. Then, the parents give a two percent interest in the real property to their children and file for the parent-child exclusion. The parents, children, and grandchildren now want to form a new family limited partnership (LP2) and transfer the real property to LP2. Will these transfers be subject to the step transaction doctrine?

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Answer: No. The statement of legislative intent, contained in the uncodified note in Chapter 48 of the Statutes of 1987 (the legislation which added section 63.1 to the Revenue and Taxation Code), allows the parent-child exclusion for certain step transactions involving legal entities. This statement of intent was amended, effective January 1, 2007,28 to include transfers involving grandchildren.

28 Stats. 2006, Ch. 224 (SB 1607).

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STATE OF CALIFORNIA 625.0233 STATE BOARD OF EQUALIZATION 450 N STREET, SACRAMENTO, CALIFORNIA

PO BOX 942879, SACRAMENTO, CALIFORNIA 94279-0082

916-323-9856 • FAX 916-323-3387 www. boe. ca. gov

August 19, 2013

BETTY T. YEE First District, San Francisco

SEN. GEORGE RUNNER (RET.) Second District, Lancaster

MICHELLE STEEL Third District, Orange County

JEROME E. HORTON Fourth District, Los Angeles

JOHN CHIANG State Controller

CYNTHIA BRIDGES Executive Director

Re: Parent-Child Exclusion — Sale of Trust Property to Trust Beneficiary Assignment No.: 13-110

Dear Mr.

This is in response to your letter requesting an opinion regarding whether the parent-child exclusion applies to the purchase of real property pursuant to an option to purchase in a trust provision. As explained below, it is our opinion that the parent-child exclusion would be available for the entire property, given that a parent-child exclusion claim form is properly filed and all other requirements are met.

Factual Background

According to your letter, your mother, V W , owned real property located at Street, , California (Property). We assume for purposes of the analysis below that

the Property was an asset of Ms. W s' revocable trust, which became irrevocable upon her death, and that you and your two brothers, S C (S ) and D (D ), are the beneficiaries of the trust. You provided us with a copy of Ms. W s trust amendment, which states that the child living closest to Ms. W s' residence shall have the first option to purchase that residence. Your letter informs us that S was living closest to the Property and exercised his option to purchase the Property.

Law and Analysis

Article XIII A, section 2 of the California Constitution provides that real property must be reassessed whenever a change in ownership occurs. A change in ownership is defined at Revenue and Taxation Code l section 60 to mean "a transfer of a present interest in real property, including the beneficial use thereof, the value of which is substantially equal to the value of the fee interest." Section 61 lists specific transactions that constitute changes in ownership as defined by section 60, including subdivision (h), which states that a change in ownership occurs with respect to "[alny interests in real property which vest in persons other than the trustor . . .

All section references are to the California Revenue and Taxation Code unless otherwise indicated.

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Mr. August 19,2013

when a revocable trust becomes irrevocable." In addition, Property Tax Rule2 (Rule) 462.160 subdivision (b)(1)(A) states that "a change in ownership of trust property does occur to the extent that persons other than the trustor-transferor are or become present beneficiaries of the trust unless otherwise excluded from change in ownership."

Therefore, there would be a change in ownership of the Property at the death of Ms. unless an exclusion applies. Section 63.1 excludes from "change in ownership"

specified purchases or transfers of real property between parents and their children for which a valid and timely claim is filed. Subdivision (h) of Section 2 of Article XIII A of the California Constitution provides that the terms "purchased" and "change in ownership" do not include the purchase or transfer of (1) principal residences between parents and children and (2) the first $1 million of real property other than the principal residence of an "eligible transferor" to an "eligible transferee." Subdivision (c)(9) of section 63.1 specifically provides that a transfer includes "any transfer of the present beneficial ownership of property from an eligible transferor to an eligible transferee through the medium of an inter vivos or testamentary trust." In this case, it appears that Ms. W is an eligible transferor and S is an eligible transferee and the parent-child exclusion would apply. The issue is whether the entire property, or only the portion that comprises S 's pro rata share of the trust, qualifies for the parent-child exclusion. •

In a trust with a "share and share alike" provision, each beneficiary is allocated a pro rata interest in each asset of the trust, subject to the trustee's power to make non pro rata distributions. In such case, if there are sufficient trust assets to equalize the distributions to all other beneficiaries, a trustee may distribute real property to an eligible transferee and other assets to other beneficiaries, and the transfer to the eligible transferee will qualify for the parent-child exclusion under section 63.1. However, to the extent that the value of the real property received exceeds the value of the beneficiary's share of the trust estate it will be considered a transfer from the other beneficiaries and subject to reassessment. (Property Tax Annotation3 (Annotation) 625.0235 (1/23/1991).)

Your case is different from a typical share and share alike situation because the trust amendment appears to grant a right of first refusal to S , the child of Trustor that lived closest to the Property. With a right of first refusal, the trustee has no power or discretion to transfer the subject property to any of the trust beneficiaries without first offering the right to purchase the property as directed in the trust. You and D possessed interests in the Property that were subject first to the specific right of S to purchase the Property from the trust. Because S exercised his right to purchase the Property for fair market value, you and

never possessed a beneficial interest in the Property. As such, the transfer of the Property from Ms. W s, through the medium of a trust, to her son S , qualifies for the parent-child exclusion for the full extent of the transfer, provided that all other requirements are met. (See Annotation 625.0235.025 (2/22/2010).)

2 All references to Property Tax Rule or Rules are to sections of title 18 of the California Code of Regulations. Property Tax Annotations are summaries of the conclusions reached in selected legal rulings of Board Legal

counsel published in the Board's Property Tax Law Guide and on the Board's website. See Cal. Code Regs., tit. 18, § 5700 for more information regarding annotations.

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Mr. August 19, 2013

The views expressed in this letter are only advisory in nature; they represent the analysis of the legal staff of the Board based on present law and the facts set forth herein, and are not binding on any person or public entity.

Sincerely,

/s/ Leslie Ang

Leslie Ang Tax Counsel

LA:yg 1:/Prop/Changeownshp & Parchild/20 13/1 3-1 1 0.doc

cc: Honorable County Assessor

Mr. David Gau MIC:63 Mr. Dean Kinnee MIC:64 Mr. Todd Gilman MIC:70

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